In today’s uncertainty of life, planning for various goals and knowing how much is needed, considering inflationary aspect is extremely vital and therefore it is important not to neglect this aspect of life insurance in personal financial planning. Many a time, people are underinsured or simply not insured, since insurance is seen as a “sunk” cost and also talking about “death” is seen as uncomfortable.
More the choice more is the confusion. Often insurance is sold and not bought and December to March is the most active phase when a lot of insurance policies are sold not based on the need, but because a receipt needs to be submitted to the accounts departments for the purpose of claiming tax rebate under section 80C!
So, what do we need to look for when taking an insurance policy?
Life Cover Sum Assured
Pure term insurance with no maturity benefit attached is often the cheapest form of insurance wherein you can get maximum sum assured. How much of sum assured which a person needs to have depended on factors like the present value of your assets, liabilities, goals, how much insurance you have, including from your employers etc. A Certified Financial Planner (CFP) can help you understand how much insurance you truly need by taking a holistic view of your entire finances considering your goals, your assets, and your liabilities.
Knowing what product is suitable
More than the decision to buy insurance, what we need to understand is what product is suitable for our needs. The wide selection of insurance policies offered in the market makes the selection difficult. Before signing onto the dotted line, have a discussion with your financial advisor and ask relevant questions to your insurance agent. Remember, insurance is a long-term contract and changes may be difficult or not possible.
Know your Current Life stage
What product is most suitable for you may also depend on your current life stage, like a bachelor, married with/without kids, grown-up children etc. Actually, if you are young, unmarried with no dependents then you do not really need insurance. Exceptions of course in situations like if you have someone dependent on your income, example parents, then insurance is critical.
As mentioned earlier, insurance is a long-term contract. Do understand how much premium can you really afford. The premium would depend on various factors like policy duration, amount of insurance, type of insurance, riders, your health situation etc. Most of the insurance arrange offers four modes of premium payment i.e. on a monthly, quarterly, Half-yearly or yearly basis. Before zeroing in on a particular policy, do know how much is your commitment towards it as you should not be paying a hefty premium initially and then later discontinue the policy halfway due to non-affordability. Policies can have very high surrender charges, especially in the initial years.
You can also add on various riders to your policy, at a cost, like accidental death benefit, critical illness etc. Understand these riders and discuss with your financial advisor whether you need these riders or not. Adding these riders later may not be possible.
Married Women’s Protection Act (MWPA). This is often misunderstood or not known to many people. Do take advantage of the same and include this, if applicable. This needs a separate blog which I will write subsequently.
Market Linked policies
If you do determine that you need a market-linked policy, do know that there are variants available for the same, from being income products to equity products or a combination. Depending on your goals and risk profile, you may choose the most appropriate one. Also, most policies offer free switches to move from one product to another without any exit load/tax implications.
Insurance is a contract based on the principle known as Utmost Faith. So, it is very important to declare your existing health status truthfully and not hide any facts related to illness or medication. This could mean a higher premium or even a denial of the policy. That should also be fine, as, after all, the purpose of life insurance is to provide for your dependents in case of untimely death of the life assured. The whole purpose could be defeated is at the time of claim, it gets denied due to the false declaration, the number one reason for claims denial. While emotional loss can never be regained in case of death of a person, financial loss can be, if done the right way.
Choosing the Beneficiary
Naming your beneficiary is very important and critical. You could also make as many changes as you would like to do, during the tenure of your policy. Remember, nominee is only entitled to “hold” the proceeds”. The transmission happens as per the Will or directives of the Court.
Online or Offline
You can purchase your insurance either online or offline. If you do it yourself online, then you need to understand the most relevant policy yourself, need to complete all the documentation online yourself and in case of claim also, the entire paperwork needs to be completed by you, in case of maturity of the policy, or by the beneficiaries in case of timely death of the life insured. If done through a life insurance agent or the financial advisor, then you or your family could get the assistance. Nowadays, even they can also complete the entire documentation online for most policies and need not to be even from your city.
There is some great news for Non-Resident Indians (NRIs). They can now take term insurance even without travelling to India and without a physical medical test. Available in select few countries about a maximum of Rs 2 crores up to the age of 45 years. If you are interested in the same, then you could get in touch with me. Further, there are also specialized policies like an employer-employee and keyman policies which exist in the market which can help save taxes even for the employer.
Insurance planning is often very neglected when working out on your personal financial planning. I would consider this to be the most important aspect, even before we start planning for our investments. Not just life insurance, but also health insurance about which I will discuss in a separate blog.