For all those people who have dependents, life insurance is a must which act as a tool for income replacement. Through this article, let’s understand the importance of Life Insurance and see how it helps you at each life stage.
The objective of life insurance is that, the surviving members do not suffer financially due to the absence of bread earner. Life insurance ensures the family to maintain the standard of living as well as to make sure that dreams & aspirations of the children are not compromised. In addition, if there are housing & car loans, it serves its role in managing them as well. All your goals are met by paying a small price as a premium.
RANGE OF PRODUCTS
Besides protection, insurance products with saving elements helps in meeting various goals such as children education, marriage, retirement planning. These products help in investing your savings into various assets for generating returns over the long term.
Some of the plans are pure term insurance plan which covers the risk of death. On death within the term, money from a life insurance policy will replace the income that will cease to accrue. Then there are other plans including endowments & Money back plans which are well suited for conservative people. Endowment plan ensures financial protection to family if the insured dies before maturity. Moreover, it is useful for his own financial needs if he survives whereas money back plan gives you as many endowment parts as the number of survival benefits (a fixed % of Sum Assured = Survival benefit ) which one can also use in investing in his own business. Equities are said to work best over long term. One can go for link his savings in unit- linked insurance plans. He can be exposed to equity about 3-4 years away from his goals and then shift his funds to debt funds which helps him in protecting the gains.
BUYING AT A PERFECT STAGE
Buying insurance is not a one- time process, and reviewing at every life stage helps. It varies from person to person. If a person is single and has just started his career, there is no need of it unless he has financial dependents. However, he can take insurance as the premiums are low because of age and medical issues connected with high age groups. As soon as one gets married, and haschildren, the insurance needarises. Education is considered the prime concern for most of the parents, investing in a child plan will ensure that your kid goes unrestricted whether or not you are around.
The value of human life is unlimited. Most of us consider to take a life cover of 3 lakh ,5 lakh or 10 lakh. But question arises here only – will such amount be enough to replace one’s income for the next several years? Ironical part is, we at most times are under insured during our lifetime.
GETTING THE REAL VALUE OF YOUR LIFE
Human Life Value approach is basically used for calculating the insurance requirement of an individual. It is the present value of all future net earnings. It accounts four factors- annual income, annual expenses, years to retirement and inflation- adjusted cost of expenses. From these factors, a reasonable assessment of income is being made. From your annual income,firstly deduct all your personal expenses such as food, clothes, travel etc. What remains is your income that your family consumes. Secondly, calculate your year of earnings left. Inflate your family expenses upto retirement & then add non-recurring expenses (children education, marriage etc). Third is to calculate the present value of the shortfall, allowing for inflation.
Best way is to link life insurance to your goals. Choose between traditional & ULIPs based on your requirements and understanding of the product. Once you have purchased, run them till maturity and restrain from existing early. Thumb rule says keep life coverage at least ten times of your annual income. Moreover, ensure that you are not under-insured as that would be the biggest mistake in your life.
This blog is written by Neha Agrawal, students of Post Graduate Diploma in Financial Planning (PGDFP), International College of Financial Planning (ICFP).
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