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Insurance is an important part of Financial Planning. Let’s understand whether you have chosen the right life insurance policy for yourself.

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Term Insurance – A must have

How does it work?

Term insurance is the most basic type of life insurance. It provides cover for a defined period of time. If something happens to the insured in the period in which he holds the policy then the nominee will be in receipt of the sum assured.

The amount of life insurance cover that you need will be based on your income multiple. Also while deciding the amount of cover you should consider the regular expenses of your family, the ongoing liabilities, the value of important goals like child education and wedding and reduce the value of your available assets to get to the amount of cover that you will need to buy.

Is it a good choice?

This is a must have for all those who have dependants. If something happens to you the Sum Assured will help your family maintain the same standard of living as before.

There could also be a case where you have enough wealth, at some stage in your life then you will not need life insurance cover because your wealth will be sufficient for your family to lead a decent standard of living. The other situation could be when you have saved enough for your regular expenses both retirement and post retirement or you have some regular stream of income like rental income or payouts like interest and dividends from your investments which will be sufficient to sustain your family’s expense needs. Also if that point in time you are in your 50s when your kids may start to become independent and most of you important goals like children’s education and wedding have been taken care of, in this situation also you may not need insurance cover.

Whole life plans

How does it work?

A term plan provides a life cover for a limited period. On the other hand a whole life policy is in force till the insured is alive. The whole life policy gives you an option to pay the premium till a certain age. On the death of the insured the Sum will be paid to the nominee. Whole life policy is mostly used for estate creation purposes.

Is it a good choice?

If it is bought at an early age the premiums are lower. The lower premium for the rest of your life is an advantage that you will get if you have bought your policy early. It is certainly not a good idea if you buy it closer to retirement again because premiums will be high due to age.

Endowment Plan

How does it work?

It is designed to pay a lumpsum after a specific term either on its maturity or on death whichever is earlier. Mostly the maturities range between 10, 15 or 20 years.

Is it a good choice?

It is a traditional life insurance product, suitable for conservative investors but the returns are rather low. So it better to invest in a debt or an equity product for the purpose of earning returns.

Money Back Policy

How does it work?

Money back policies generally give you a fixed percentage of your sum assured every few years. For eg you may have a twenty year money back plan which may give you 15% of your sum assured every five years and on maturity you will receive the balance amount along with bonus if any.

Is it a good choice?

These policies give a guaranteed sum of money on the date as mentioned in the policy document but if you sit back and calculate the returns that you may have made on your policy against the premiums that you have paid, they tend to be very low. If you would invest the same sum of money that you are paying towards your premium into any other debt or equity instrument as per your asset allocation, it will yield comparatively better returns.

ULIP

How does it work?

A Unit Linked Insurance Plan (ULIP) is product which offers you a combination of insurance cover and investment. A ULIP is a market linked product. They take money from investors and invest in a combination of stocks and bonds that you choose, and are structured like mutual funds. They have a lock in period of 5 years. ULIPs have a multiple charges that need to b analysed carefully before you decide what is to be done. ey does not get invested.

Is it a good choice?

The higher initial charges and lock-in makes ULIPs unattractive, along with the lack of flexibility of changing managers along the way in case of underperformance.

Our view,

Insurance and investments should be kept separate. Insurance should be bought for the purpose of buying a life cover. Therefore, when it comes to life insurance a term plan is ideally what you should look at.

Image credit:www.insurancecompanycompare.com

 

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As India progresses, most of us now have a plethora of investment opportunities to choose from. The more the options the more queries one has. One area where almost all of us have a host of queries is Insurance. Insurance plans whether traditional plans or ULIPs have many details that one needs to understand. We, at Plan Ahead are always looking at ways of helping clients with their queries. As we say at Plan Ahead, it’s always good to be informed.

The IRDA (Insurance Regulatory& Development Authority, India) has launched a consumer education initiative. As a part of this initiative I came across a Life Insurance handbook, which is a handy guide for all your insurance queries. So wanted to share this Life Insurance handbook with all. Hope you find it useful.

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Do you really need insurance? “I am not saving enough”, “I need to generate better returns on my investments” or “I need to save regularly” are the common reasons we hear from the investors when they first come meet us. As we start to evaluate their existing portfolios, virtually all of them come peppered with at least a couple of life insurance policies wherein the information available is sketchy.

On being probed on the amount of life cover available under these policies, the expected rate of return and the targeted maturity amount, most investors are unable to give a clear answer.

Tax saving, need for life coverage or saving for the future are the most common reasons given for having bought the life insurance cover. The question is do you really need that insurance policy?

Ideally insurance should be bought to compensate for the financial hardships that your family would undergo in case of your untimely demise.

Unfortunately most insurance policies are bought keeping the tax benefits and expected return instead. The ideal way to buy insurance is as follows:

* Estimate your correct insurance requirement: Essentially, the best way to estimate your insurance needs is to make a list of your likely household expenses in your absence, assuming that your current lifestyle is not compromised.

Remember that inflation will continue to hit regular expenses, even when you are not there. Also estimate the costs that would be required to meet various life goals such as education for your children, medical expenses for your spouse and outstanding loans.

This will give you a reasonable estimate of the life coverage that you should have. If you find that you need help for this, approach your financial planner. If you find that your existing assets are sufficient to cover all the above expenses, there may not be a need for any insurance cover.

* Buy a standalone term cover: Term covers tend to be the cheapest and most efficient method of buying insurance as they allow you to cover yourself to the desired extent at a reasonable cost. Most investors tend to under insure themselves by focusing on the premium rather than the ideal sum insured. By keeping your insurance and investments separate from each other, you also have the flexibility of deciding on parameters like ongoing performance independent of the insurance cover.

* Cheapest insurance cover is not necessarily the best: Just like other products that you buy where price is not the sole deciding criteria, you should focus on items like claim payment track record, amongst others before deciding on the insurer you want to go with.

* Reevaluate your insurance need every two years: Since goals, finances and responsibilities tend to changes with times, there may be a need to increase or decrease insurance as changes occur.

Buy your term insurance in smaller lot sizes, though it may be slightly more expensive, so that you have flexibility to increase or decrease covers.

This article was written by Vishal Dhawan, CFPCM and appeared in the Deccan Chronicle  on  28th May 2011 .

 

 

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