Insuring your life is not a solution to increasing financial responsibilities
Life insurance is necessary for those with families or dependants. It is an arrangement between the policyholder and the insurance company to pay the beneficiaries named by the former if he/she dies.
Take the example of Arun. He is in his mid-30s and wants to secure his family’s financial interests. He believes if Rs 5 crore was available for his family in the event of his demise, it would help them meet their needs.
Although Arun earns Rs 20 lakh a year, he does not have Rs 5 crore ready to meet this disaster. His investments and bank balances put together are worth approximately Rs 50 lakh – ten per cent of the targeted amount. How will he get the remaining 90 per cent?
The apparent solution is to buy a life insurance cover worth Rs 5 crore for the next 20 years or even longer.
PATTERNS OVER TIME
Increment in salary or an addition to the family are just some excuses for the likes of Arun to increase their life cover. With every hike, the gap between the safety net and networth keeps decreasing. This means the life cover should also reduce. But, the reverse happens mostly.
It is impossible to get a cover for all possible risks you are exposed to. And the factors adding to the need for insurance continuously evolve. Therefore, it is best to look for alternate ways to mitigate risks.
The ability to pay premiums has been a reason to buy insurance plans for many. Investors should look at avenues that offer life insurance and investment separately instead of policies that offer investment in addition to life cover.
Policies that offer higher of fund value and sum assured at the time of death, break the premium into two parts – life cover and investments. And pays only the higher value among the two. The same if achieved through a combination of term plan and mutual funds will pay sum assured plus the investment value.
If your parents have a sound financially and you are young and single, stay away from life insurance. Many other options have the potential to deliver higher average return in the long run. The low-age benefit lost by delaying the life coverage can also be compensated.
The time when one touches his/her targeted safety net varies with their career advancement and investment growth. Lower the proximity to the safety net, higher is the need for life cover.
| INVEST OR INSURE? | ||
| Factor | Characteristics | Solution |
| Incompetent Policies | Impossible to get a policy for every risk as needs are evolving | Stay away from products that do not meet your needs |
| Convenient Investment Option | Buy life cover as paying premiums is convenient | Opt for investments that also offer life insurance |
| Single and working | Do not buy life cover if parents are financially independent | Other investments can deliver higher long-term returns |
DISADVANTAGES OF LIFE COVER
These policies are not a hedge for disabilities during your lifetime. Even if the disability riders are added, they have a cap on the maximum payout.
Some policies with a cash value let you withdraw after sometime, but come with many clauses. So, be prepared for a longer lock-in and to wait for the entire term. In many cases, families are deprived of safety net on the grounds of omission of an important piece of information in the insurance application. And very little can be done about this.
The writer is a certified financial planner
