Life Insurance is one of those topics which many of us do not want to discuss. We simply do not want to face the darkest side of life. Some people buy insurance as an investment option or just for saving tax without actually understanding the primary purpose of it. Let’s try to answer some of the most common questions about a Life Insurance.
Why do I need a Life Insurance?
In an unfortunate event if you are no more in this world, imagine the life of your near and dear ones without you or your support. So if you are the only earning member and your family completely depends on you, insurance is a must. However, there are a few scenarios when one may not need an insurance like for e.g.
1. If you are single and don’t have any dependants
2. If both husband and wife are earning enough and are financially independent of each other
3. If you and your family is super rich and accumulated enough wealth for maintaining a steady lifestyle, then you may consider not buying a life insurance. If you’re reading this article, most likely you don’t fall under this category 🙂
Do I have enough insurance?
Insurance amount varies for different individuals. It depends on the standard of living, financial liabilities etc. Experts say that on a broader basis person should have at least 10 years in hand salary or cover all the liabilities including home loan, personal loan, car loan, child education etc. for calculating the insurance amount. You may work out the exact amount with your financial planner.
Which type of insurance do I need?
For buying the life insurance, one can choose Unit Linked Insurance Plan (ULIP), Endowment Plan or Term Plan.
Unit Linked Insurance Plan (ULIP):
Unit Linked Insurance Plan is a combination of insurance and investment. Depending on the plan, payment made is invested towards equity or debt products or a combination of both. One is entitled to receive some maturity amount plus bonus when the policy matures, however it is not guaranteed. On the down side, charges associated with ULIP are generally very high. If you are planning to buy any ULIP, please pay attention to various charges like allocation charges, fund management charges, administration charges, fund switching charges, surrender charges, mortality charges etc.
Similar to ULIP, saving component is associated with this type of insurance too but charges are not disclosed in these products. All these policies have surrender value or individual will get the maturity amount when the policy ends. The investment return on these policies are low as most of the funds are allocated to debt products. As an investment option, endowment plan returns may not even beat the inflation.
These plans are the pure life insurance product. The premium you pay for a term plan goes towards mortality charges. This is cheapest of all but least marketed or advertised product compared to ULIP or endowment plans for a simple reason – agents do not earn fancy commission by selling term insurance. You may earn some handsome discount if you buy term insurance online. Term insurance does not have any surrender value, these are useful to your family only in case of an unfortunate event.