24 Feb 2014

Do I Need A Life Insurance Policy?

For a lot of us the answer is yes.  However, there are some people who do not need a life insurance policy. If a policy is needed, one must get the right kind of policy. There are options between term insurance and ULIPs. Which one should you get?

Insurance in business is defined as a product that tries to place you back in time as if the unfortunate incident did not happen. This is possible with car insurance or home insurance. However, since life insurance is a payout amount in the event of a person's death, it is correctly known as life assurance.

Who Needs A Life Insurance Policy?
1. If you are the main income source in a family and have dependents in the family be it a spouse, parents, children or a combination of these, then you should get a policy in your name. In the event of an unforseen circumstance, the dependents will benefit from the insurance policy.

2. If you and your spouse are working and depend on both incomes for running the household, a policy is required in each of the spouse's name.

Who Does Not Need Life Insurance?
1. For certain married couples, both partners are financially independent and have an emergency fund. If this is the case, you may not need a life insurance.

2. If you are single and do not have dependents e.g. your parents are still independent then you do not need a policy in your name.

3. If you and your partner are retired and have ample retirement amount stashed away, you may not need a policy.

Which Type Of Insurance Policy Should I Get?
1. Term Insurance
Most people need a term insurance policy. This is a policy where premiums are lower. You will pay a certain amount for a fixed period of time e.g. twenty to thirty years. If an  unfortunate event does not occur, no amount is due to the policy holder at the time of maturity. Most people do not like the idea of paying premiums for many years and not getting anything at the end. The truth is that term insurance covers have very low premiums and make sense for most people. Remember, life insurance is seeking to achieve financial stability in the event of death. It is not an investment.

2. ULIPs
Unit Linked Insurance Products are very popular among people. These products charge high premiums and invest your money in mutual funds. The money is locked in for a period of three to five years. ULIPs claim to have a high return but if you deduct all the expenses and management fee charged by the policy, ULIPs never have a net return more than 6 or 7%. This is a popular product since you get a lumpsum amount at maturity and the returns are tax free. If you already have a ULIP let it run. At maturity deduct all the expenses and calculate the real return you got. Accordingly decide whether you should switch to a term life cover.

3. Online Term Cover
Online term policies offer even lower premiums than term policies offered via the traditional paper method. The policies are just as good. If  you are comfortable doing things online, this is definitely the route to take.

How Much Cover Should I Get?
You should have a cover for about 8 to 10 times your annual income. This is the money your dependents will have in case you the bread winner is not around. E.g. if your annual income is 10 lakhs, the insurance payout should be for 80 lakhs to a crore.

Things To Remember About Life Insurance Policies :
1. If you are the main income earning member in the family, get a policy in your name and not your child's name.
2. Life insurance premiums are tax deductible.
3. Term insurance premiums increase with age. Premiums are lower in your thirties than in your forties and so on. If you have dependents, get a term policy sooner rather than later.
4. Online term cover offers the same policy for a much cheaper rate. Companies believe that individuals fill forms better on their own and the agent as a middleman is now gone.
5. When choosing a policy, remember to look at claims resolved percentage. This will give you an idea of how many people have received money in the event of an untimely death.

Remember to carefully look at your situation and decide if you need a life cover. If yes, opt for the one that fits your need and lifestyle.

No comments:

Post a Comment