Insurance is a highly misunderstood
product, and it's often bought and sold for the wrong reasons. At the same
time, it's a very important part of your life, and you must know certain
ground rules for making the right decisions in the new year. Many of us
consider insurance just another investment for tax savings. Our day-to-day
lives are full of unpredictable risks, for example, loss of life, loss of
income, critical illness, disability, etc. Insurance planning means figuring
out adequate cover against "insurable risks" and getting the most out of the
premium you pay. Tax exemption is just another aspect of it. Having
the right insurance cover gives you peace of mind as it provides financial
support in case of contingencies.
Life insurance is a
replacement for your income. When your income ceases or falls insufficient
either due to death, illness, retirement, or a major goal such as a child's
education or marriage, insurance fills in the gap. On your death, the money
received from term insurance policies will provide a corpus with which the
family can pay off debts, convert dreams into reality, and still lead a
comfortable life. You must have seen cases of non-working mothers or
non-earning family members getting insured. It goes against the fundamental
principle of insurance. Therefore, it's important that the breadwinner covers
the risks to his life and income so that his family's quality of life is not
compromised after he is gone.
Calculating life insurance needs is not a simple
exercise; you must evaluate your current and required coverage in 2010 and
take corrective action. Remember that each of us has our own lifestyle, goals,
aspirations, and dependents, which may be completely different from the life
situation of your friend or colleague. So what works for someone else may not
work for you. There are essentially three ways to calculate your insurance
calculates the corpus required to take care of
the family's future expenses and goals.
Inflation diminishes the value of money, and
hence expenses need to be adjusted to inflation
for the calculation of protection required.
Human Life Value
It is the economic value of an individual; the
present value of all his or her future income.
Setting aside the part of income one spends on
oneself, the protection required through human
value calculates today's value of one's income
the years till his or her retirement.
In this method you calculate your needs by
considering each of your dependents and what
financial milestones you want to achieve for
The needs may range from child education,
to repayment of loans. Next you assess your
assets and investments and shortfall due to loss
life. This gap in income can be filled up by
Ideally, insurance must be taken to cover the working
period of one's life. You take insurance to protect your dependents from the
loss of your income; using the same logic, you take insurance for the time
that the dependents are being supported by your income. Hence, it is advisable
to take insurance until one's retirement. However, when insurance is taken for
protecting and saving towards specific goals, then the tenure of the plan
should match the years left for meeting the goal.
Choosing a product will depend on the specific need and
the life stage one is in. What is the final product you will choose? When
there are multiple choices that match the need, it is affordability that makes
the final choice. Most importantly, individuals must be aware of the purpose
of the insurance they are buying. They must know that life insurance products
for investment and savings are structured for the long term and meant for
someone who is earning and whose earnings are supporting his or her
To be able to prescribe the best insurance products for an
individual or family, a financial plan is necessary. Any advisor needs
in-depth knowledge and understanding and proper prioritization of all aspects
of your life. The probable duration of life, amount of security needed,
present and future needs and shortfalls, and post-retirement requirements are
also essential pieces of information to be collected. Knowledge of the
"markets," mutual funds, and economic climate, coupled with comprehension and
application of HLV (human life value), expense protection, and corpus
requirements for retirement, helps in prescribing an effective solution. With
the awareness of the need for proper financial planning on the rise, coupled
with the plethora of insurance products available, it is imperative that you
take any decision after doing your home work or engaging a competent financial
In A Nutshell
It is very important that you are adequately covered, as inadequate cover
is equal to no cover at all.
Insurance planning is the first step towards financial planning, and
financial planning should be the first step towards purchasing insurance. To
advise an individual on his or her insurance needs, it is important to get a
holistic view of the present and the future.
Insurance requirements must be reviewed every two years or when there is a change in the family scenario, for example, the addition of dependents.
The insurance requirement changes with every change in your life: income, expenses, lifestyle, members, liabilities, and assets.