Buying the right insurance policy is an important aspect and tool of financial planning. Financial planning is a dynamic process so your financial objectives will change as your life progresses and similarly your insurance needs will also change with marriage, childbirth, buying new assets etc. Insurance and financial planning are interlinked.
We will take an example and see how some situations may change the insurance needs of a person.
- Mayank started working at the age of 25; he did not have any insurance then except the medical insurance cover provided by his company. His father was the primary breadwinner in the family.
- He soon bought a motor bike; he bought his first insurance to insure his bike; auto insurance.
- In the coming year his father retired so Mayank became the primary breadwinner; he then bought a life insurance policy for himself and a family health insurance policy as his parents were no longer covered by any medical policy.
- A couple of years down the line he got married; since he and his wife were traveling abroad so they bought travel insurance.
- His wife was working so he did not immediately need to increase the value of insurance cover he has; but since his annual salary had increased over the years he bought an additional life insurance policy.
Mayank’s insurance needs will continue to change as he maybe buys a house, a car and has a child. As the above example clearly illustrates the kind of insurance you require changes with time as the financial obligations and your lifestyle also changes.
A wide variety of insurance is available to cover various assets that you have, your life and health as well. Here we will discuss just life insurance as an aspect of financial planning. It cannot replace the investment part of financial planning and similarly investments cannot substitute insurance – but insurance and financial planning are crucial.
How Does Insurance Help?
We all agree death is inevitable and an irreparable loss to the family; while the emotional loss cannot be compensated insurance can take care of the financial crisis for the family. This becomes especially important when you have children, spouse and or parents to support. Life insurance is a tool to protect the family against financial distress and compensates for the financial loss that occurs due to death of a person. A good insurance policy should ensure that your dependants do not face a financial crisis and do not have to alter their lifestyle in your absence.
Though some organizations offer some basic life insurance to their employees; it is advisable to check with your employer about it and evaluate whether what they offer is enough. While buying life insurance three important aspects must be kept in mind:
Choose the Right Beneficiary
Beneficiary is the person who receives the insurance amount in case of the death of the insured. You can choose anybody to become the beneficiary of the policy; the situation can turn tricky in case you support your parents as well as wife and children. In such a scenario you could probably take two separate policies and have different beneficiaries in each.
Illustration: As discussed in the above example Mayank supports his parents so he should make sure that at least one of his policies names them as a beneficiary.
Type of Policy
Choosing the right policy is important; whether you want a term policy or a whole life policy, you must also compare the premium vis-à-vis the death benefit, does the company provide you bonus, is the money invested in equity as in the case of ULIPs etc. Here it is important to remember that you should buy a policy keeping in mind the fact that the policy should be able to provide the required financial assistance to you family in case of the unfortunate event. Death cannot be timed; the utility of the policy to a family may be lost if the money is invested in equity and the family requires the funds when the market is on a down side.
Illustration: Mayank could take a combination of term and whole life insurance; the policy that has his parents as beneficiaries could be a term policy for 20 to 30 years. Term life policies are cheaper and are the best option. If all his insurance needs are covered with Term insurance, he could buy a whole life policy where he will be covered till the age of hundred and will get survival benefits too.
This is the amount that the beneficiary receives when the insured person dies. Death benefits must be decided based on factors like number of dependants, the standard of living; assets and liabilities etc. There are various theories and ways to calculate that how much insurance one should have. The insurance needs do not change with time only but vary from person to person.
Illustration: We look at two examples to clarify this.
a) Ashish and Anita are in their early thirties work at a bank have no kids and live in their ancestral house. On the other hand is Venkat who is the same age bracket has a small kid, a house loan and stay at home wife. Who do you think needs a larger insurance cover? Of course, it is Venkat. Ashish and Anita’s life insurance cover needs would be much lesser than Venkat
b) Mayank as we discussed earlier bought an additional policy as his standard of living and family size increased; this increased the death benefits automatically; again when his children are born and his financial obligations increase he will have to keep increasing his life cover.
Insurance and financial planning go hand in hand. Buying the right insurance policy at the right time goes a long way in providing you and your family a sense of security.
It should not be treated as just an investment option or merely a way to save tax.
You should choose a policy that suits your requirements; a large number of companies offer a host of policies with different features. Finding the right insurance policy will not be difficult and there are websites and professionals who can help you in making the right decision.
More reading at – the best life insurance plan