Before buying Life Insurance

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Before buying life insurance

LIFE insurance is almost a basic need for everyone. It's the first step in personal financial planning. It fulfills different purposes for different people and can provide valuable benefits if you make your choices carefully.

Essentially there are two parts in a typical life insurance plan — the risk protection component and the savings component. The first one is called death benefit and the second one, maturity benefit. Some plans have only death benefits (pure term plans) and some plans may have only maturity benefits. But many plans have both components in varying proportions.

The first thing you must know is whether the life insurance plan you are planning to buy has right components in the right mix.

Let's look at a situation:

■ If your family is financially dependent on your income.

■ If you have financial liabilities like home loans or other loans.

■ If you do not have other assets to take care of your family's financial needs.

In this case, you should buy a life insurance plan with a high risk protection component. The sum assured should be six to 10 times of your annual income depending on your age minus the insurances and investments you already have that can be liquidated in a financial emergency.

For example, if your annual income is Rs 5 lakh and you are aged 35, you may go for a cover of Rs 50 lakh. If you already have Rs 5 lakh insurance cover and Rs 5 lakh bank deposits, you may subtract these amounts and go for Rs 40 lakh sum assured.

You may go for a pure term plan or go for a savings plan with a high risk component that gives insurance cover of the desired amount What're the pluses and minuses of such a solution? ■ The main advantage of a fixed period level term is the premiums are very low and affordable. You will get tax breaks on the premium. But this plan does not give anything if there's no death during the policy period, So, it's a pure insurance cover that may not help you grow your savings.

■ When you take a credit life for loan component, the benefits are even lower cost than pure term, easy instalments, tax benefits. But like in term cover, you will have no maturity benefit, no wealth accumulation, cover available only for the loan component and may not provide for additional insurance for financial protection of the family.

■ Similarly if you take a group insurance cover through your employer, you benefit from even lower cost than pure term, easy instalments, tax benefits.

But the drawbacks are no maturity benefit, no wealth accumulation, cover available only as long as you are part of the group.

If you are young and have financial liabilities, you should ideally take a credit life for any of your loans and add a pure term rider or a term plan. For meeting your other financial goals, you should also take a savings plan separately for wealth accumulation.

Let's look at another situation:

■ You have covered yourself against the possible financial crisis due to untimely death. But you need to save regularly to ensure you have enough money to meet your children education, marriage, health and living expenses after retirement.

■ You need to plan several years ahead for important financial goals such as your child'seducation, retirement, etc., for which you need to save money regularly in small amounts.

■ You want to start saving now for money you may need after 10 years or later.

In this case, you should buy a life insurance plan with a regular savings component. Many life insurance plans offer savings cum risk protection – you may choose a plan with half yearly or yearly mode of payment basing on the amount you would like to save.

Happy Investing!!

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