Life Insurance is one of the most popular savings/ investment vehicles in India. Ironically, its probably the least understood too.
An insurance policy offers much more than just tax planning and investment returns. It offers you the ability to plan for unforeseen events that could affect your family's financial profile adversely.
Factors to consider
Your financial profile and needs are different from that of your neighbour. And the same is true for your insurance needs.
However, irrespective of the differences, the number of dependents you have and their financial needs are the most important factors to consider.
Issues to consider while evaluating the above factors include:
the wealth, income and expense levels of your dependents,
their significant foreseeable expenses,
the inheritance you would leave them, and
the lifestyle you want to provide for them.
How much insurance do you need?
Obviously the above factors mean nothing to the insurance planning process unless they are quantified.
Globally, the time-tested approach used by insurance and financial planners is the capital needs analysis method. Our Are You Adequately Insured planning tool, based on this approach, will help you arrive at how much insurance you need.
When should you re-evaluate?
Whenever any of the factors discussed above change.
Risk cover versus investment returns
Insurance options range from policies with low premium that offer you almost no returns to those with high premium that effectively offer post-tax returns of around 8% to 9.5% p.a.
These returns are at the lower end of fixed-income returns available today and hence are relatively unattractive.
We recommend you buy an insurance policy skewed towards investment returns only if you are in the high-tax bracket, prefer to invest in low-risk, fixed-income options and have exhausted all the other such investment options available.
Whole life versus limited period
As you grow older, you may not have as many dependents (your children would become self-dependent) or your wealth may reach a level where it can support your dependents’ financial needs in the event of your death.
These possibilities bring us to the interesting question on whether you should insure yourself for whole life or for a limited term. Obviously, the cost of insurance for the latter is lower.
We recommend you insure for whole life only if you never expect your wealth to reach a level where it can support the financial needs of your dependents.
The premium paid for an LIC policy also qualifies for tax rebate under Section 88 of the Income Tax Act. The maximum premium amount that can qualify for rebate is Rs60,000 per annum and you get a rebate equivalent to 20% of the premium paid, from your tax liability for the year.
Understand how much insurance you need
This is the single most important factor to evaluate before you select a life insurance policy. For this, you must consider the current expense profile of your dependents and the current wealth level of your family. Also, consider what your dependent’s risk tolerance level is. Our Are You Adequately Insured planning tool can take you step-by-step in addressing this issue.
Selecting your Premium Paying Term (PPT)
How long do you want to pay your insurance premium for? Key factors this decision could depend upon are -
How many years you see yourself earning a regular income
The level of your regular savings
The amount you can commit to paying regularly as insurance premium
How long you want to be insured versus how long you expect to pay a premium for?
Other important questions to ask
Besides understanding how much insurance you need and selecting your premium-paying term, you need to consider some other key factors, such as -
Do you want to participate in bonus/ profit share?
What is the primary objective of your seeking insurance - mainly risk cover, mostly investment returns?
Do you want accident cover?
For a detailed understanding of the factors you need to consider while selecting a life insurance policy, and the rationale for the same, use our Insurance Planner.
This planning tool will also take you step by step and arrive at a shortlist of life insurance policies appropriate for you, based on your personal profile.