MANY of us like to believe that we have a robust financial portfolio that would take care of our future. Interestingly, the plan would work only if funding the plan is regular. What happens if the funding suddenly stops?
When it comes to investing in insurance, many of us mistreat it as a pure tax-saving tool. With the advent of ULIP and many innovative products in the market, thanks to privatisation of the industry, insurance is also being looked at as an ‘investment’ option that is expected to pay dividends/ returns, along with securing one’s future. Irrespective of our motivation to buy insurance, we often grope in the dark to determine the right approach for buying insurance products and assessing if we have an adequate insurance cover.
NEED-BASED APPROACH
Life insurance has moved from protecting life to protecting lifestyle. Today, there is a choice of innovative products that meet financial needs at each of one’s life stages — be it marriage when one assumes responsibility to protect one’s family, or at the birth of a child when one assumes added responsibility towards family or when one is preparing for a comfortable retirement. Simply put, financial needs can be classified into four broad categories:
* First is protection, which ensures that if anything was to happen to you, your family continues to be financially protected and maintain the same lifestyle.
* Second need is that of saving, which means that one should be able to generate required corpus to meet responsibilities, such as higher studies of your child, buying a house, etc.
* Third need is that of retirement. With the average age of post-retirement life increasing, planning for comfortable retirement is becoming increasingly important.
* The last need is that of investment, which helps build wealth.
The first step in buying insurance is to adequately assess ones ‘needs’ — what is my life stage (age, family, etc.) and what are my responsibilities (protecting my income, children’s education and wedding, buying a house, retirement, etc.)? How much corpus will I require to meet such financial responsibilities, and how do I plan them so that even if I am not around, my family can still sail through these milestones? Often we find these to be tough questions to answer, but we must remember that they are fatal if ignored!
WHAT’S ADEQUATE COVER?
If assessing your financial need while buying insurance is important, the adequacy of insurance protection is equally critical. We are often led to think, ‘Am I adequately insured?’
Consider the example of a 35-year person, who needs to protect his family against any mishap that may happen to him. Let’s assume that his expenses are Rs 50,000 per month (Rs 6,00,000 per annum), which he/she needs to protect. In other words, his/her needs to buy a protection plan (commonly known as term life) that would, in case of his death, give a corpus which when invested, is sufficient to give his family a return of Rs 6,00,000 per annum. Assuming that the investing instrument (bank fixed deposit, mutual fund or any other such instruments) gives an annual return of 10%, then he needs to have a protection (sum assured) of a minimum of Rs 60,00,000 (6,00,000 x 100/10 = 60,00,000). In case the returns are that of 7.5%, he needs a sum-assured of 6,00,000 x 100/7.5 = Rs 80,00,000.
Clearly, if he does not have a sum assured of Rs 60,00,000 (assuming investments give a return of 10%) he is under-insured. Interestingly, there is no other instrument other than life insurance which can help he generate this corpus if he is unable to keep contributing for this desired corpus.
Additionally, if he needs to save for his/her five-year-old son’s higher education, he needs to have a saving plan in place. Various products in the market offer such saving solution, which not only saves for the need, but in case of an unfortunate death of the policy holder, offers to protect this saving and give the promised return at maturity.
Assuming that he/she needs Rs 10,00,000 for his son’s higher education when he turns 21 (16 years later), he/she needs to have a child education plan (type of insurance product) in place, which will yield a return of Rs 10,00,000 (sum assured) after 16 years. Hence, if he does not have an insurance product that has a sum assured of Rs 10,00,000, he is under-insured.
WHAT IF I AM UNDER-INSURED?
More often than not, we do not think (or do not want to think) what will happen when we are gone — especially when one has not met all life stage responsibilities. Though the family goes through the emotional trauma, financial burden leads to additional pain. One has no remedy for the emotional pain, but smart financial planning can certainly ease the financial pain.
If one is under-insured, it could lead to a slip in family’s lifestyle in case of an eventuality. The family may need to compromise on various fronts to make the ends meet. These could include slipping to lower grade house (to save on rent), lower grade schooling for your children, cutting of expenses, including food, medical, entertainment and many more such expenses.
Clearly, while life insurance is critical to meet financial responsibilities, adequate insurance cover is the key for meeting your responsibilities. So, having a cover is not enough — having adequate cover is critical.
When it comes to investing in insurance, many of us mistreat it as a pure tax-saving tool. With the advent of ULIP and many innovative products in the market, thanks to privatisation of the industry, insurance is also being looked at as an ‘investment’ option that is expected to pay dividends/ returns, along with securing one’s future. Irrespective of our motivation to buy insurance, we often grope in the dark to determine the right approach for buying insurance products and assessing if we have an adequate insurance cover.
NEED-BASED APPROACH
Life insurance has moved from protecting life to protecting lifestyle. Today, there is a choice of innovative products that meet financial needs at each of one’s life stages — be it marriage when one assumes responsibility to protect one’s family, or at the birth of a child when one assumes added responsibility towards family or when one is preparing for a comfortable retirement. Simply put, financial needs can be classified into four broad categories:
* First is protection, which ensures that if anything was to happen to you, your family continues to be financially protected and maintain the same lifestyle.
* Second need is that of saving, which means that one should be able to generate required corpus to meet responsibilities, such as higher studies of your child, buying a house, etc.
* Third need is that of retirement. With the average age of post-retirement life increasing, planning for comfortable retirement is becoming increasingly important.
* The last need is that of investment, which helps build wealth.
The first step in buying insurance is to adequately assess ones ‘needs’ — what is my life stage (age, family, etc.) and what are my responsibilities (protecting my income, children’s education and wedding, buying a house, retirement, etc.)? How much corpus will I require to meet such financial responsibilities, and how do I plan them so that even if I am not around, my family can still sail through these milestones? Often we find these to be tough questions to answer, but we must remember that they are fatal if ignored!
WHAT’S ADEQUATE COVER?
If assessing your financial need while buying insurance is important, the adequacy of insurance protection is equally critical. We are often led to think, ‘Am I adequately insured?’
Consider the example of a 35-year person, who needs to protect his family against any mishap that may happen to him. Let’s assume that his expenses are Rs 50,000 per month (Rs 6,00,000 per annum), which he/she needs to protect. In other words, his/her needs to buy a protection plan (commonly known as term life) that would, in case of his death, give a corpus which when invested, is sufficient to give his family a return of Rs 6,00,000 per annum. Assuming that the investing instrument (bank fixed deposit, mutual fund or any other such instruments) gives an annual return of 10%, then he needs to have a protection (sum assured) of a minimum of Rs 60,00,000 (6,00,000 x 100/10 = 60,00,000). In case the returns are that of 7.5%, he needs a sum-assured of 6,00,000 x 100/7.5 = Rs 80,00,000.
Clearly, if he does not have a sum assured of Rs 60,00,000 (assuming investments give a return of 10%) he is under-insured. Interestingly, there is no other instrument other than life insurance which can help he generate this corpus if he is unable to keep contributing for this desired corpus.
Additionally, if he needs to save for his/her five-year-old son’s higher education, he needs to have a saving plan in place. Various products in the market offer such saving solution, which not only saves for the need, but in case of an unfortunate death of the policy holder, offers to protect this saving and give the promised return at maturity.
Assuming that he/she needs Rs 10,00,000 for his son’s higher education when he turns 21 (16 years later), he/she needs to have a child education plan (type of insurance product) in place, which will yield a return of Rs 10,00,000 (sum assured) after 16 years. Hence, if he does not have an insurance product that has a sum assured of Rs 10,00,000, he is under-insured.
WHAT IF I AM UNDER-INSURED?
More often than not, we do not think (or do not want to think) what will happen when we are gone — especially when one has not met all life stage responsibilities. Though the family goes through the emotional trauma, financial burden leads to additional pain. One has no remedy for the emotional pain, but smart financial planning can certainly ease the financial pain.
If one is under-insured, it could lead to a slip in family’s lifestyle in case of an eventuality. The family may need to compromise on various fronts to make the ends meet. These could include slipping to lower grade house (to save on rent), lower grade schooling for your children, cutting of expenses, including food, medical, entertainment and many more such expenses.
Clearly, while life insurance is critical to meet financial responsibilities, adequate insurance cover is the key for meeting your responsibilities. So, having a cover is not enough — having adequate cover is critical.
