Planning To Buy Life Insurance Understand Your Needs First
- Understand your need for insurance—it could be to protect your family, to invest or to save tax
- The amount of cover you take can play a key role in providing adequate protection to your family
- Don’t forget to factor in debts such as home loan when deciding on a sum assured amount
In recent times, awareness about life insurance has gone up. The covid pandemic claimed many lives. A lot of families also lost their breadwinners and were left in dire straits after having spent all their savings for the treatment of their loved ones in what proved to be a lost battle.
In a lot of cases, there were life insurance policies in the names of those who passed away, but the families discovered that they were simply not enough. If you do not want your family to face a similar situation and are concerned about providing them adequate protection in your absence, here are things you must keep in mind to get the most suitable life insurance cover.
Understand Why You Need Insurance
The most important aspect is to understand why you are buying an insurance cover—is it to invest, to save tax or to protect your family? The answer to these questions can help you make the right choice.
According to experts, first and foremost, insurance should be bought for the purpose of protection of your family in case something unfortunate happens to you. The insurers pay the sum assured to the nominee and the money can help pay for the expenses, settle your loans and take care of other money needs. Term insurance plans may serve your needs as they give the maximum cover at the cheapest cost.
If you are buying for the sake of investment, remember that the insurance coverage may not be large enough in proportion to the premiums you pay. That’s because the focus of these policies is diluted—as they are looking at investments too. Remember to check the costs of investment in insurance policies; you may find cheaper investment products elsewhere in both debt and equity spaces.
If you need protection and need to save tax as well, the choice should be term plans.
If tax saving is your only purpose of buying life insurance, take other mandatory investments and expenses into account, including your Employees’ Provident Fund, children’s fees and home loan EMIs. Also, look at the asset allocation of your portfolio to decide whether you want to ‘invest’ in life insurance or equity-linked savings schemes are a better option for you.
Estimate Your Needs
To be able to correctly estimate the needs of your family, you need to calculate the monthly expenses and multiply it with the number of years you expect your family will take to become independent. As a general thumb of rules, experts suggest that your life insurance cover should be 10 times your annual incomes so that it can last for a few years even after inflation takes out a bite in successive years. This gives enough time to the family to recover from the emotional loss, get their bearings together and become financially independent.
If you have large debts, such as a home loan, your cover should be larger by taking into account that amount too. You won’t want your family to spend everything settling a debt and then be left with nothing for their own expenses and needs. So, if you have a home loan of Rs 40 lakh, enhance your insurance cover by that much. There are certain plans especially customised for such needs, where the sum assured reduces as the principal amount of the loan goes down over the years.
In terms of investment, remember that most life insurance investments would be counted in the debt part of your portfolio. Consider your asset allocation, as per your risk capacity, and make a decision accordingly. Like mentioned earlier, it is pertinent to compare the costs you pay to invest through a life insurance policy and the costs in other instruments.
If you find it too complicated, stick to the simplest form of insurance, which is term insurance, and keep your investment needs separate. If you are still confused, it’s best to consult a financial advisor.
Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No: 022 - 2288 2460, 022 - 2288 2470. Composite Corporate Agent License No.CA0113. Insurance is the subject matter of solicitation. ICICI Securities Ltd. does not underwrite the risk or act as an insurer. Insurance is the subject matter of the solicitation. The advertisement contains only an indication of the cover offered. For more details on risk factors, terms, conditions and exclusions, please read the sales brochure carefully before concluding a sale. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. ICICI Securities Ltd. is act as a distributor of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.