Wednesday, 25 January 2012

Do i Need Insurance?

Do I Need Life Insurance? Ask this question to an insurance agent. The only answer he knows is "YES". It is like asking a barber if you need a haircut. 

let us first understand what Life Insurance is: Life insurance is contract between the policy holder and insurance company. The insurance company promises to pay assured sum to the nominee, if the policy holder dies during the term of the policy. This is more of semi technical definition. Is it hard to remember?

Let’s make it very simple: You are the breadwinner of your family. You need to go for insurance if you don’t want your family to land into financial crisis in case your untimely death.

Does Everybody Need Insurance? The answer is NO. Let’s see who needs and who does not.

You don’t need a life insurance or Life Insurance can be optional for you if:
  • You are single and your family is not financially dependent on you.
  • You are nearing your retirement age and your kids are now major.
  • You have no kids and your wife earns a descent salary.
  • You have no liabilities and the wealth you have created is good enough for your dependents. 
If you don’t fall in above list, you should go for a Life Insurance if:  
  • You are married and have minor children. 
  • If you are the bread winner and your family members are financially dependent on you.
  • Buy it Right now, if you have dependent family and liabilities like home loan or so… 
Now the big question is how much insurance you need.
There is no prefect answer for this. It differs from individual to individual. Somebody who  is married and have school going kid might need a higher insurance cover in comparison to somebody who has kid who would be completing his college this year.
Here are few ways of evaluating insurance cover you need.
  • Thumb Rule: Your insurance cover should be around 8 times your annual Gross salary. + All your liabilities like personal loan, Home Loan, Car Loan etc.
  • Life Style Rule: Example should help in easier understanding. Suppose your current monthly expense is 10 K. The amount of insurance should be such that if invested, the income generated needs to be at least 2 times the current monthly expense. This means the interest generated should be at least 20K per month.  Your existing Liabilities also need to be factored while doing the while doing the calculation.
  • Goal Based Rule: 15 years down the line, you want your kid to go higher studies in US or it could be your kid’s Marriage. You need to factor this amount when you buy this insurance.
  • Systematically Decreasing Rule: Life insurance is not a onetime activity. When you are newly married and you don’t have sizable investments, you would need a big cover. With every passing year, your wealth/investments will keep on growing.  Once in every 5 years evaluate your investments and accordingly lower your Insurance cover. The day you get to know that your investments can take care of your family, you can scrap your Life Insurance.
Now that you have evaluated how much Insurance you would need. The next uphill task is what type of Insurance we should go for?  The most simplest and perfect answer would be Term Policy. You don’t have to look out for any other insurance. Don’t get carried away by return, bonus, etc etc. Term Policy is the only financial product that would give you highest cover at the cheapest price.
Click here to know why Term Insurance is not Popular.Tip to buy a Term Policy: Choose a company that has got descent settlement ratio and reputation.
Take Away: Not everybody needs Life Insurance. Life insurance can be optional for few. Evaluate your Insurance need smartly. Factor in all your liabilities, amount you need for specific goals like Kid’s marriage. Once you know the cover you need, go only for Term Policy.
Do you agree Term Insurance is the only real insurance? Am i right when i say Insurance can be option for few. Leave your opinion.


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