A simple guide to Life Insurance

Life InsuranceUnderstand why life insurance is very important for your family’s financial security. The reasons people buy life insurance are various ranging from tax saving, investment to protection.

The first and most important reason for buying it, must be to protect your family against financial insecurity in case of your death.

Term insurance is the cheapest way of doing this. It’s also the easiest to understand. On payment of a premium, the plan guarantees a sum assured or, the amount your family will receive in case of your death. The higher the sum assured, the higher the annual premium you have to pay.

Consider an example (and it could very well be you), of a person we will call Anand, who is 39 years old.  The table below shows his financial situation:financial-situationNow, if I was in Anand’s place, I would also feel very unsure of committing to any regular payments that I have to make.

Already, my expenses use up almost my entire salary and we need to dip into my wife’s salary to save for our two children and all other goals. We haven’t even started thinking about retirement planning.

However, consider the possibility of Anand passing away unexpectedly – be it in an accident or a sudden health ailment (like cancer) that was growing, but was undiagnosed all this time.

While the family would have to deal with the shock of his death, Anand’s spouse will also be hit by a big financial problem. His life insurance choice was made primarily keeping tax saving and returns in mind.

Unfortunately, at this moment, all his wife gets is the sum assured (and some more, if the policy was bought way back and the corpus has grown).

So, in all likelihood, his wife will get Rs 10 lakhs as the life insurance amount. There’s a home loan of Rs. 20 lakhs outstanding. Imagine your spouse having to decide between selling off the home to pay off the home loan, or having to encash every rupee of your savings just to hold onto your home (since her salary is inadequate to cover all expenses including the EMI).

Like Anand, you should pick one of the three choices with respect to life insurance.

1.Get life insurance cover equal to the current home loan outstanding:

This is the least everyone should have, and any compromise on this is just unacceptable. In Anand’s case (he’s a non-smoker), a Rs. 20 lakh term insurance plan bought online will cost well less than Rs. 500 per month (or Rs. 6,000 per year).

While too many additional expenses seem difficult to commit to at such a time, surely, Rs. 500 per month is doable.

2. Get life insurance cover enough to cover for current expenses:

Do this after adding an expected inflation rate that your family will have to face up to, after your death. In most cases, this is likely to be the ideal case.

3. Get life insurance cover to replace your current income:

Do this after adding an expected annual increase in salary. In most cases (typically in cases where expenses are comfortably lower than income), this would be considered very safe but might not be easily affordable. If possible, it could be a great option though.

Life insurance is not among the most interesting topics to discuss. However, given that death isn’t either but must be faced up to, you may as well give the subject your full attention and do the right thing. After all, isn’t your family worth it?

To help you get started, look at the life insurance tool here.

Source: BigDecisions.com

Curated from A simple guide to Life Insurance

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