What is the need to buy life insurance and how to calculate the sum assured?
It is financially prudent to insure one's precious life for the following important reasons
- Continuing source of income for your dependents and offspring.
- It is an universal truth that whoever born in this world are bound to die and it holds good for young and old and does not spare the poor and the rich.
- It is the bounden duty of the head of a family to support their dependents in a fitting way even after their death because they are dependent on the sole bread winner financially.
The calamity may not be in the form of death but in some circumstances, it will affect the health the individual in such a way that the affected is incapable of doing any fruitful work to earn a livelihood.
In such cases, health insurance comes in handy. The compensation from the death will be useful
- To pay for the last rites towards the funeral and burial expenses, debts and other dues left by the deceased.
- As a forced savings which will act as corpus fund and the interest accrued will not be liable for tax when the money is paid as death claim. This makes the payment of premium for life insurance as a high priority one.
- People with no heirs need not bother about the beneficiary of the death claim and they can name any charity of their choice as a beneficiary and these kinds of people make the poorest of the poor feel happy even in their death.
- Death taxes are in vogue in many states and the dependents of the deceased are at great inconvenience when taxes are to be paid for death.
- It acts as a source of inheritance to the heirs of the deceased even though the deceased failed to acquire any estate to be passed on to his dependents.
What shall I do before I buy Life Insurance?
If you are the first time buyer of life insurance, there are many things to be considered. Some of the important points to ponder are
- Remember insurance is not an investmen; on the other hand, this policy provides financial support to those who need money in future, which is generally unforeseen. This kind of planning has helped many people in the world for paying off medical bills, health claim, education, and more. However, the catch point is that you have to identify the needs exactly and choose the one that best fits the bill.
- With the advancement in technology, there is no need to run behind the brokers and agents. If you are savvy enough to use the internet and find out the right websites, then calculation of premium that ought to be paid and the death benefit one would get in unforeseen circumstances, will be transparent.
Type of policy to select
One shirt doesn't fit all. Similarly life insurance policies available are as diverse as we, the human beings and sure there is a policy that suits your needs. The different plans include whole life insurance, variable life, critical illness insurance and spouse and children related policies to take care of all members of your family.
Reputation of the company
This is again an important factor that has to be considered before taking the final decision. If the company that sells the product is reputable, then the product itself is considered as good. Reputed insurance companies help in speedy settlement of claims. Credit ratings of the insurance company provide credence about it and form a basis for its selection.
Solicit help if you what one!
If you are not comfortable with the terms and conditions listed out in the website or the brochure of the insurance company, do not shy away from getting the help of a financial expert. An expert will guide you in selecting the right plan and the optimum insurance coverage.
Bust the insurance jargons
If you are interested in insuring your life, health, home, auto or anything else, it is paramount to know the meaning of the basic terminologies involved in the insurance business like dividends, cash value, premium etc. Give more importance to the finer prints in the terms and conditions which are often overlooked. Make yourself comfortable and be conversant with all the options before start signing across the dotted line.
How much insurance is sufficient for me?
The need to insure doesn't arise at all if you have no dependent and have sufficient money in your kitty to pay for the final expenses. But not all are blessed with this type of situation and in order to leave an inheritance for your beloved ones, the bread winner has to secure his / her life and buy sufficient coverage.
It is better to get adequate life cover that is sufficient to compensate the income earned by you along with other additional expenses that your family members have to incur in the event of your unfortunate loss. Hidden income is another important aspect most of the people fail to realize while assessing the adequacy of the life cover. It includes subsidized group life insurance and health insurance plan offered by your employer. Apart from this, the usual taxes imposed by the state on the deceased like death tax, administrative costs incurred towards winding up of the estate and passing the same to your heirs etc.
How to calculate the amount to be insured?
There is difference of opinions about the amount for which a life insurance is bought for a particular individual. Some are of the opinion to calculate it based on the multiples of salary approach, say 20 times the total salary earned before taxation. This is mainly based on the assumption that the equivalent money earned from salary is compensated when 20 times of the gross salary is invested in bonds, assuming that the interest rate is 5%.
But this calculation suffers from a serious flaw in that it does not take into account the inflation. If inflation is assumed to be 3% a year and taken into account while calculating the total sum assured, the principal amount will disappear in the sixteenth year.
Isn't there any solace for inflation which nibbles your principle slowly but steadily?
Life insured can feel happy with the social security and the survivors of the life insurance need to pay only the money that is adjusted for inflation upto a period until the older the child attains maturity (18 years). The rest is taken care of by the social security.