Life insurance for protecting loved ones Photo Credits – istock
Have you ever thought of how much insurance would you require to live your life securely? Or you are simply taking policies for tax benefits or as agents approach you? It is a good question to be contemplated upon if not already done. Let’s see here the tips to choose insurance plans depending on factors like his age, annual income, liabilities and future goals and needs.
Things to consider while planning insurance needs:
Life insurance is one of the oldest financial tool and a must have for everyone to secure his and his dependants’ future life, especially in case of an unforeseen event. There are options galore in the market today from the traditional term insurance plans to insurance-cum-investment like Unit Linked Insurance Plans (ULIPs).
Decision based on income: A general approach one should have for a wise insurance planning is a planning based on his /her income. It not only means that the premium should be affordable, but also after considering if will be enough. Some people take life insurance to get maximum tax benefit under Section 80C of Income Tax Act, whose limit is Rs.1,00,000/- . But while doing this, you should consider whether you will be in a position to make the same payment in the coming years also, considering other possible liabilities like home loan, family expenses etc. The key here is to balance your insurance needs with the cost of insurance.
Decision based on Inflation: An important point to be considered while planning your life insurance needs is the hiking cost of living or inflation trends. Suppose you earn Rs.5, 00,000 annually. If inflation is assumed as 2% yearly, after 20 years, the compounded annual amount will be additional 40%. So you / your dependents may require more amount then accordingly to maintain the same standard of life that you are enjoying now. A trustable financial expert can advise you on choosing an insurance plans considering this factor.
Decision based on needs: Another approach in planning insurance need is based on the analysis of the financial needs of the insured or his/her dependants. Let us take an example of ‘Mr.A’ having an annual income of Rs.5, 00,000. Suppose his monthly expenses come to Rs.30, 000, and he has to provide for his children’s education and marriage after 10 years. A good insurance planning for Mr.A needs to be calculated in a way that in case of any unforeseen mishap, his family should be able to cop up with the monthly expenses and also get a helping hand at the time of future expenses like children’s higher education and marriage. So these requirements considered while planning the amount of insurance coverage.
Human Life Value Approach: A human life value (HLV) approach in calculating life insurance needs will be ideal in this regard. Under this approach, the net value of a person opting for insurance will be calculated on the basis of his earnings, age, years of service left, his own expenses, etc. This net amount multiplied with the rest of the span of his life period is known as his life value. So the insurance amount will be decided on this contribution of him to his dependants after allowing some provision for inflation.
Suppose, a person with a monthly income of Rs. 50,000 spends Rs.15,000 towards his own expenses. In this case, he can spare Rs.35, 000 for his dependants. So his annual contribution to his dependants will be Rs.4, 20,000 and his HLV is the multiple of this Rs.4, 20,000 with the number of year’s service left.
Period of cover: An ideal policy period is till the time one intends to work. This means that it will not be a good idea if you choose a 10 year period if you are in your early 30s. Insurance companies in India generally offer plans up to 30 years, whereas few companies Aviva and Religare have expended plans till 40 years. The maximum age of entry and the age limit during policy expiry time are other things to be considered.
Three Golden Rules:
The three golden rules for planning your insurance needs are:
Start Early: The most factor in insurance planning is to you start planning early; as soon as you get your first job so as to enjoy maximum coverage at easy, affordable premium payments.
Importance to Risk Cover: Another important point that you should remember is to give importance to “risk cover” as the main clause in any insurance policy and keep ‘savings’ to next. This can guard your dependants in case of your unexpected death or accident.
Compare and Decide: Insurance policies can be bought both in online as well as offline modes. Whatever mode you choose, always remember to do a comparative analysis of all similar plans for choosing the best plan.
BankBazaar.com is the best online platform to compare term insurance policies offered by various companies for choosing the best suited plan for you.