Life Insurance is one of the most important financial product you should buy and yet, is often the most mis-sold product in India. Considering this, are you making the right choice, and moreover, are you buying life insurance for the right reasons?
Here are 4 questions to help you decide.
Question 1: Do you really need it?
Unlike other products or services you buy, you are not the beneficiary when you buy insurance. So who will get the money if you are not around anymore?
You need life insurance as long as someone is dependent on your income to take care of their expenses and would be affected financially if you were gone. No dependents? Then you don’t need life insurance.
Question 2: Are you buying life insurance or trying to save tax?
If you are like a lot of Indians, you probably have thought of life insurance as a tax saving option or an investment. While life insurance premiums are eligible for tax deductions, thinking of life insurance because you want to save tax is wrong. There are much better ways to save tax.
Life insurance is an expense and you should treat it as one. Don’t expect returns from it or buy it as an investment option. This means you should normally stick to a good term plan that meets your expectations.
Question 3: How much do you need? How long is the cover for?
Life Insurance cover is meant to act as a replacement for your take home income. Most experts believe, you should insure for at least 10-30 times your current annual take home earnings. This also means that you have to upgrade your policy at different stages in line with your income. This is where duration comes in. The longer the duration, the higher would be the cover.
Here’s a quick rule of thumb for figuring out how much life insurance coverage is required.
Find out how much money your dependents require to maintain their current lifestyle. Use this to figure out how much money they need to invest in a safe instrument like Bank FD or debt mutual fund to get the same amount as interest after tax. Also consider money required for life goals like children’s education, marriage, medical contingencies etc.
The figure you arrive at is roughly the life insurance cover you need.
Keep in mind that living expenses increase every year. So make sure your insurance coverage is also increased to support the increased living expenses.
Question 4: How much can you afford to pay?
The next question is, how much do you have to pay as life insurance premium (the amount you will pay the insurance company every year or quarter)?
Life insurance doesn’t necessarily have to cost you a lot. Let’s first understand what affects how much you pay as premium.
- Your Age
The younger you are, the cheaper your life insurance premium will be.
Note: You normally don’t need insurance once you cross 50 as generally, you would have accumulated most of your savings by then (and also invested them).
- Your medical history as well as your lifestyle habits
If you have no family history of serious illnesses such as heart disease then this will reduce your life insurance premium. Negative lifestyle habits, such as smoking, increase your premium payable.
- The kind of life insurance plan and its duration
Term Insurance is simply a life insurance plan that is valid for a certain number of years for which you pay a nominal premium. In this plan you will not receive any pay out at the end of the time period decided. The pay-out will happen only in case something untoward happens to you. This is normally also the cheapest option.
Other life insurance plans act as investment vehicles which invest insurance premiums in different kinds of financial instruments. These offer returns which can vary. The premiums in such plans are more as well.
Pro Tip: Always buy term life insurance only. The returns offered by money back insurance policies are typically around 4-6%, a figure that’s way below inflation rates.
- Any riders/ additions that come with the plan
Various riders, such as accidental death benefit, tend to increase the cost of the life insurance. Insurance against particular diseases also can cost you more.