With so many insurance products in the market, one gets confused on what to choose and how much insurance is enough. Insurance cover depends on the objectives of the person. Is it just security or is it to provide for some liability?
Review cover regularly
Insurance is not static and needs to be reviewed by each person at different stages in life, depending on the changes in certain factors. The amount of insurance required depends on the future earning capacity of an individual and the assets owned by him. The amount of insurance required changes with factors such as income of the family, assets and liabilities of the family, size of the family and the number of dependants in the family, and the stage of life of the dependants.
You should review your insurance needs at least once in every 3-4 years to take into consideration any changes in the earning capacity, profile of dependents, cost of living, liabilities such loans, disposable income etc to ensure that the life insurance cover is adequate.
Life insurance policies are long-term contracts. It is important that you make the right choice of plan to meet your requirements.
Participatory policies are less flexible and adaptable. Those opting for these policies need to be certain of their milestone requirements and will have to time the purchase of their policy accordingly. These policies are restrictive in that they do not provide the option of rebalancing the proportion of life insurance and savings within the policy.
On the other hand, unit linked policies have flexibility, transparency, simplicity, liquidity and efficiency in fund management. These policies are adaptable to the changing needs of the policyholders over their lifetime.
Define financial needs
While choosing a policy, it is important to choose the insurer first. Some factors you needs to look at are the company background, promoters, service, performance track record, and product portfolio.
You should also understand your own financial needs, taking into account life stage, risk profile, dependants, disposable income and liabilities. This will help identify the protection and savings needed. The protection should provide for all the liabilities and future earning potential. This will, at a minimum, ensure the lifestyle of the dependants is not significantly altered if anything unfortunate were to happen to the policyholder.
The savings portion will be determined by the financial goals of the individual. Life insurance as an investment instrument has several distinct advantages. There is very little or no risk of capital loss, the long-term nature of the contract ensures that investment horizons are long-term, thus, leading to efficient funds management. The regular saving and benefits of compounding ensure a substantial corpus over a period of time.
Term insurance
This is often referred to as 'pure insurance'. Term policies provide life insurance cover for a specified period of time. You can typically buy term insurance for periods ranging from 1-30 years. If the policyholder survives the term, the risk cover comes to an end. Normally, in term insurance, maturity proceeds are not available, though under certain plans, premiums are refunded on maturity.
Also, there is no surrender, loan or paid-up values granted under these policies because no reserves are accumulated. These features make term insurance the cheapest among whole-life, endowment and other types of life insurance policies.
A term plan is designed to meet the needs of those who are initially unable to pay the larger premium required for a whole life or an endowment assurance policy, but they hope to be able to pay for such a policy in the near future. Hence, it may be desirable to leave the final decision regarding the plan to a later date when a more relevant choice could be made.
