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Wednesday, 5 June 2013

Come to Term(s) with Life Insurance


Life insurance evokes negative outlook amongst majority of people because of the aggressive marketing and mis-selling. Purely from the risk protection point of view, however, there is no alternative to Life insurance. Let’s look at some of the common misconceptions, facts and answers to some questions related to Life insurance.

Misconceptions-

·       Life insurance is the best way to invest money.

·       Life insurance is only meant for claiming tax deduction.

·       Life insurance is the only way to achieve long term goals.

·       It is the only way my money can be safe.

·      Child life insurance policies are a must to plan for education of children.

·       Term insurance is a useless plan because the insured gets nothing if he survives the term of the policy.

Facts-

·      Life insurance should be looked only from the point of view of ‘Risk Protection’.

·      Entering into long term contracts such as Life insurance with only aim of saving tax for a particular year, leads to imbalance in personal finance.

·      Traditional Life insurance policies do not beat inflation. Hence, they are not the ideal investment vehicles to ride for achieving long term goals.

·      With strict regulations, there are many investment avenues available where your hard earned money is safe.

·      Child insurance plans are only a product of marketing gimmick. It is easy to sell these plans because people get emotionally involved.

·      Term insurance is the purest form of Life Insurance. It sticks to the fundamental of ‘Risk Protection’ with which the concept of insurance was born. The Sum Assured is paid to the nominee in case of untimely death of the life insured.

·       If the policy holder survives till the end of the premium paying term of Term insurance plan, no amount is paid.

WHY get a Term Insurance?

·       It is the cheapest and simplest form of Life Insurance.

·       It provides a safety net for entire family.

·      It ensures that the family is not burdened for future liabilities like livelihood of surviving spouse/children, child education, marriage, outstanding loans, other goals etc. when a breadwinner dies.

·      Human being cannot be replaced, however financial difficulties arising due to the demise can be reduced with the help of Term Insurance.

·      People who think they are not getting any money in return if they survive till the end of term of the policy, need to think that Term plans come at a very low cost. They should give due consideration to the fact that by paying a low premium for insurance coverage with term plan and by saving the exorbitant premium for the traditional and other forms of insurance, they can in fact save much more. In turn, they can invest the savings in better instruments with better returns. This helps in planning and achieving long term goals.

How much Term Insurance is enough?

·      Thumbs are indeed ruling in these times due to their utility in sending sms and using smartphones. However, is it prudent to calculate your need for life insurance only with the help of thumb rules (like Life Insurance should be 10 to 15 times of your annual salary?).

·      Calculation in a more scientific manner by applying Human Life Value method should be adopted. It assesses a person’s value in light of his present earnings and his earning potential till retirement.

What to do with the current holding of Traditional plans or ULIPS?

·       Although the answer to this depends on case to case basis, however in majority of cases a way out may be found in terms of making the policies paid up, surrendering the policy or non-payment of further premiums.

·       Various clauses mentioned in the Policy need to be studied in detail to arrive at a decision.

·       Loss booking capacity of the holder also needs to be assessed before taking any decision.

·       People tend to get emotionally attached with the policies they hold. They need to get rid of this attachment and check in real terms if the policy is beneficial in the long run and is supporting any goal.

·       One should also check what return he/she is getting from these type of insurance + investment plans? Since these plans have the element of investment, it is necessary that the return factor is checked. Do not ignore this fact because the plan is also giving you the insurance protection.

Due to widespread availability of free advice and mis-selling, insurance portfolio of a person is the major cause of financial stress. Come to terms with it, sooner the better.