I like watching Hindi movies. Especially the part where the good wins over evil and when the entire family has a happy ending. But life is not a reflection of the celluloid screen. Everyone knows that. To achieve everything one wants in life – marriage, children’s education, travelling for holidays – it needs planning. And in each stage of life, there is a different need. Life Insurance is a steady and stable way for people to plan these life stage needs.
But there are some important points that one should keep in mind while buying insurance.
No other financial instrument offers protection. Hence think 'Protection' first while buying life insurance. Also, answer a simple question - Who needs life insurance? The answer is that if you an individual who has dependants for financial support you need life insurance. Most consumers understand the need to buy life insurance for long term savings and protection. What they overlook is how much life insurance and what kind of policies need to be bought at what stages of life. Life insurance buying should be a carefully planned activity that should consider the family’s future, current financial circumstances, future liabilities, living standards, and health with each of your life stages.
The amount of life insurance that an individual needs depends on his age, current income, future financial commitments, liabilities and stage in life depends on the number of financial dependents he has. All these factors help in arriving at the amount of life insurance which will help the dependents maintain their existing lifestyle and not compromise on significant life goals in the absence of the bread winner. After all, life insurance is about having adequate financial protection to life and health risks and creating a corpus for multiple life stage needs.
As one goes through different life stages, it is important to keep adding life insurance policies to one’s portfolio according to these changing needs. For example, a person without huge financial liabilities may just buy a term cover. However, as his life progresses and his familial responsibilities rise, he should start focusing on long-term savings and protection. By buying the right mix and amount of insurance, you can cater to your future financial needs with the several life insurance plans available and tailored to suit your changing financial needs and responsibilities.
To make it a bit more specific, apart from providing death benefits to the insured’s financial dependents, life insurance plans works as long-term savings and investments plans. As life insurance is long-term, the policyholder gets into a habit of systematic savings and the power of compounding aids his wealth creation. A mix of endowment, money back and long term pension plans should be part of every personal finance portfolio. Additional insurance covers in the form of riders can also be attached to the plans and that will enhance the scope of the cover.
Riders are essentially niche risk covers such as accidental death or contracting a critical illness. The incidence of such risks is low; however, if they do strike it can leave many of us in a situation much worse than death. Common understanding is that purchasing such riders is a waste of money as it is viewed as money spent that will never be used. But people should understand that without proper cover, there is a probability that they might get into a financial disaster. The solution is to understand one’s financial capabilities, liabilities and long terms saving prospects and buy life insurance. This should be reviewed as and when there is a change in income, increasing liabilities to match one’s lifestyle needs.
Unlike common perception, life insurance is not complex. If you can decipher your life stage needs, it is easy to choose a plan based on each need. To end I would suggest a 3 sided formula that will make it easy for you to buy life insurance - right time, right amount and right kind.
By Rajit Mehta, Executive Director & COO, Max Life Insurance