A few days back, I had an opportunity to meet my Guru once again. After some initial chatting, he immediately asked about what I had my worries. Though it was just a strange question put up by him so suddenly and after a long period during which virtually we did not have any contact, I knew that in the past also, he had been asking about my well-being as if he was diagnosing by reading my face or concluding through the informal chatting and suggesting the viable way out. This time, I tried to skip his question by diverting his attention to some other topics but again, he asked me why I was not so comfortable.
At last, I had to tell him that I was not sure about the future of my family after my death if that took place the next day or after some time until another source of income got developed to support them after me. My savings were not enough to do it and my income was getting depreciated due to price hike. The global recession is threatening the easy survival too. “Oh! It means that you have not got secured yourself and your family so far,” he asked me. “What should I do? I could not save any surplus after meeting expenses of education, food, clothing, health, conveyance and accommodation to start some business. After doing my job, I could not spare much time to undertake some part time job to do so,” I tried to convince him.
He did not agree and told me, “No, I do not expect such reply from a person like you. Even less educated persons are securing them so that their family does not suffer after they are not with them. Now, there are so many products available in the market through reputed Insurance Companies that you can enjoy your life when you are active. And if some thing wrong happens with you, you and your family can go on smoothly. After you even, your family can be well looked after.”
What he insisted is that with the increasingly uncertain times, what with terrorist attacks and tumultuous financial markets, getting an insurance cover for me and my family has become imperative. However, many of us do not take decisions because of it being such a big ball of wax.
Choosing the right kind of insurance cover not only determines the care that we receive should our health take a wrong turn, but it can be the wild card in our financial plan. There are many benefits of an insurance cover; however, topping the list of benefits is the financial support that a family gets in the event of the untimely death of the income provider.
As getting the insurance cover is an important aspect of a sound financial future, choosing the right insurance cover is equally important.
First and foremost, choosing an insurance policy must be based on our current and projected income or simply put our current and projected ability to pay the insurance premiums, our medical state, our age, future financial plans, etc.
Secondly, you also need to look at:
The cost of the insurance cover depends upon many reasons, some mentioned above and other factors depending on what is covered in the cover or its riders. Thus, you have to keep a close eye on the cost of buying insurance and ensure that it justifies the benefits covered under the policy. Simply put, a right balance must be struck between the cost and benefits available.
You need to ensure that the insurance covers all your dependants and that it also covers the majority of health problems.
Thirdly, the promises made by different insurance companies are all fine; however, it depends on you whether you need a pure insurance cover or you need an insurance cover coupled with an investment opportunity.
The four major kinds of insurances that most people opt from are:
Term Insurance — Term life insurance or term assurance is life insurance which provides coverage for a limited period of time.
Endowment Policy– An endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its ‘maturity’) or on earlier death.
ULIPs — Unit Linked Insurance Plan (ULIP) provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time.
Money-back Policy — Unlike ordinary endowment insurance plans where the survival benefits are payable only at the end of the endowment period, money back policies provide for periodic payments of partial survival benefits during the term of the policy.
When comparing these plans it is important that you keep in mind the factors that were talked about in the first point. Let’s take a look at an example:
John is a 25-year-old businessman who wishes to take an insurance cover for InRs. 20 lakh (InRs 2 million) for a period of 20 years. There are two options he can choose from.
Option 1 — He can opt for an endowment/money-back policy and pay a premium of InRs. 90,000 annually. If he survives through the policy term, he shall be eligible to receive the entire sum assured and vested bonuses, if the same are declared by the insurance company.
Option 2 — He pays InRs. 4,000 annually and enjoys the risk cover of InRs. 2 million. Being a term insurance cover, he is not eligible to gain any survival benefit from the insurance company and the insurance premium paid can thus be treated as the cost of covering his life for 20 years.
Whereas under Option 1, he has earned an annualized return of about 6%; Option 2 gives him about 9% returns during the period. Therefore, it is important for John to decide what he wants and opt for a plan accordingly.
It’s important to correctly identify your dependents’ financial needs to establish just how much life insurance cover to arrange. A general rule is to choose a policy providing at least ten times your salary, but more may be appropriate, with the amount varying depending on how you intend it to be used.
Basically you decide how much you want your dependents to receive in the event of your death, and your premiums will be determined accordingly. Hence, make sure you keep all these factors in mind, compare different plans and choose your cover accordingly.
Be Happy – Keep Yourself and your family secured.