Buying life insurance policy is a very crucial decision, from both financial point of view and reliability point of view. Unfortunately, only 10 per cent of Indians are insured. No matter how much one person earns, nobody knows what kind of destiny his future holds for him. Many people succumb to premature death every year from either any severe ailment or from any sudden accident.
You never know if you happen to be the next victim! And the worse situation is if you are the sole earning member of the family and you suddenly leave this world. It could make a devastating impact on your family members for their inability to meet all the expenses. Also, if you have left them with any unpaid debt, that would consequently force to lower down their standard of living. One of the best and easiest way to secure your family’s future financially is to buy a life insurance policy.
Also, do not be ignorant about the total benefit you would get at the end of the tenure of your life insurance policy if you stay alive. Specifically, if you are young, there is enormous chance of getting benefit in your lifetime at the end of tenure of your life insurance policy. We will discuss ten compelling reasons to convince you in buying a life insurance policy.
• To stabilize financial condition of your family members after your death:
This is the most important aspect of life insurance that one needs to count. If your entire family is fully dependent on you, then after your death, you certainly do not want to let them face any hardship or difficulties. No matter if it is just for compensating your lost income or to pay your child’s education fees or to make sure your wife gets the required financial security, life insurance policy can save the hardships of your surviving dependents.
This article is meant for all the readers because consumers often do not receive accurate and useful information about life insurance. Instead, many are exposed primarily to two sets of mythology – one offered by or on behalf of the life insurance business, and the other by various critics of the business. Among the myths emanating from at least some segments of the business are the following:
1. All life insurance companies charge about the same price. The fact is that are large price difference among companies for essentially the same type of life insurance coverage.
2. Life insurance companies are regulated adequately by the states, so it does not matter what company you patronize. Actually regulation is much weaker in some states than in others, and some of the requirements constitute inadequate protection for consumers.
3. Life insurance companies, particularly the mutual companies are operated for the benefit of policy-owners and their families. Actually, the life insurance companies, including the mutual companies are in business to make a profit, just as other businesses are.
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Among the myths promulgated by the critics of the life insurance business are the following:
1. The life insurance companies are overcharging the public through the use of outdated mortality tables that overstate death rates. The facts are that up-to-date mortality tables are used in many of the companies’ calculations, and, moreover, the choice of a mortality table, in and of itself, may have little to do with how well the policy-owner fares financially in his or her dealings with a life insurance company.
2. The type of life insurance that includes a savings component is more expensive than pure life insurance protection.
• To repay your debts:
Suppose you have availed a home loan during your living tenure. If you suddenly pass away without repaying the loan, then you certainly would not want your family members to deal with financial liabilities or any pecuniary crisis. Any kind of outstanding debt be it a housing loan or car loan or personal loan or a loan on credit cards, everything is usually taken care of if you purchase the proper type of life insurance policy during your living tenure.
The determination of your life insurance needs is an individual matter. No hard-and-fast rules apply to everyone, because no two people view their circumstances in the same way. You might ask, “How much life insurance is owned by the typical person in my age and income bracket?” Even if data were available to answer this question, the information would not mean much. Many individuals own little or no life insurance, many others own substantial amounts that are far short of their needs. Life insurance is a means for filling any gap between these requirements and your available resources. Once you master the procedure, you can repeat the steps every two or three years (assuming you continue to live), to check the continuing adequacy of your life insurance. Your family will have financial requirements to meet after your death. They may be grouped for convenience into three categories: final expenses,
debts and income needs.
Funeral expenses will be incurred. Even in the absence of a funeral, the expenses of disposing of your body will be incurred. The expenses of settling your estate will be incurred. Death taxes, as well as local property taxes that are commonly lagged by one year, will be incurred. These expenses will have to be paid either immediately or within a short time after your death. The final expenses may be about 10 percent of your estate, provided you are a person of modest means. For example, if the total of the property you own – including bank accounts stocks, bonds, real estate and life insurance – amounts to between INR 1 lac and INR 2 lacs, the final expenses probably will be in the range of INR 10,000 to INR 20,000. For a family with a much larger amount of property, the final expenses probably will be more that 10 percent of the estate. You may want to ask your family’s attorney for an estimate of your final expenses.
Your family may have to pay off various short-term obligations, including charge accounts, instalment loans, and short-term notes. The unpaid balances of these items should be added and the total considered among the financial requirements of the family immediately after your death. Long-term obligations, such as the mortgage on your house, may be viewed in one of two ways. You may want to treat the mortgage in the same manner as other debts and consider the unpaid balance (including any pre-payment penalties) as an immediate financial requirement of your family upon your death. Or you may want to view the mortgage loan payments as a continuing cost of housing your family and consider that cost in establishing the family’s income needs.
In terms of its impact on the final result, the most important of your financial requirements is the income your family will need following your death. Presumably the figures you select here will be based in part on your current earnings and on various other considerations to be discussed later. To determine the income requirements of your family, you must consider several things.
First, thought should be given to the question of whether your spouse may become or will continue to be gainfully employed. If so, your family’s income requirements will be smaller than if you assume your spouse will not be gainfully employed.
Second, the remarriage question should be examined. If the assumption is that your spouse will remarry, your family’s income requirements will be for a shorter period of time than if the contrary assumption is made.
Third, the way you handle your mortgage loan should be consistent. If you decide to treat it as a debt to be paid at your death, the income requirements of your family will be smaller than if you decide to treat future mortgage payments as part of the cost of housing your family.
Fourth, an interest rate must be selected for use in calculating the amount needed to provide the required income. Suppose your family needs INR 18,000 per year for ten years after your death. The total is INR 1, 80,000. However, because interest can be earned, an amount less than INR 1, 80,000 is needed to produce an income of INR 18,000 per year for ten years. For example, if the funds are assumed to earn 6 percent interest, the amount needed at death to provide INR 18,000 per year for ten years is about INR 1, 40,000. Understanding of how this figure is computed needs some actuarial calculations.
Determine the total death benefits provided by your present life insurance policies. Do not forget to include the death benefits under any government life insurance you may have, any group life insurance you may have through your employer or union, and any group life insurance you may have as a member of an association. Some of your policies may provide for additional death benefits in the event of accidental death. Frequently such benefits are called “double indemnity”. You may also have some policies that provide death benefits only in the event of certain forms of accidental death. An example is an automobile club policy providing coverage only in the event of death in an automobile accident. Although much publicity often accompanies accidental death, most deaths are caused by illnesses. Thus, to be on the conservative side in listing your resources, you should disregard death benefits that are payable only if death is the result of an accident.
• Utilize this policy as an investment strategy:
Life insurance policy is an investment instrument that keeps you engaged in depositing the premium instalments for a long term. Hence it actually helps you to achieve your long-term goals like to purchase a home or to start a start-up venture business. It also provides you with a myriad of investment options which come along with different sorts of life insurance policies. Certain policies are coupled with some investment products that helps you to earn dividends based on their strategic performances. So if you opt for an investment-linked policy, make it sure that you have gone through the fine print to make yourself fully aware of the potential risks including returns.
• A device to generate a steady source of income post-retirement:
Everybody would like his retirement savings to last forever until they die. With the help of a life insurance policy, you can ensure to have a steady stream of regular income at the interval of one month. Investing money in an annuity is more like a pension provision. Hence put some money at a regular interval to a life insurance policy and take the benefit of getting a steady flow of income each month after your retirement.
• Buy at cheap rate when you are young, be wealthy when you attain some age:
Every millionaire does not need a life insurance policy. If you have not thought of creating an emergency fund yet or you are still living on your parents’ savings, life insurance might not be a priority for you. On the contrary, if you have dependent wife and children or you are a co-signatory in a loan jointly availed with your parents or any other family member (be a student loan or a home loan), you should start considering to purchase a life insurance policy. This apart, cost of coverage is on the lower side when you are unmarried. Insurance agents try to sell you a life insurance policy which you actually may not need. Therefore, do your due diligence or go to a financial planner to find how much insurance you require to consider in monetary terms considering the other assets you own. If you are unmarried then you will have lesser liabilities but still there may be other dependents. You need to ensure those dependent near and dear ones are all taken care of by you. If you are young, healthy, devoid of any bad habits and have a good health history running in your family, you have your insurability at its peak. So you can get the best rates of life insurance policy in the market.
• Tackle your business along with:
Not all, but some life insurance policies does take care of your business. If you are owner of a business, then your partner can purchase your part of businesswithout going into any difficulties. Your business partner has to enter into a buying-selling kind of agreement first. The pay-out from that agreement would go to the dead partner’s nominees. But that does not give the deceased partner’s nominee a stake in the company.
There are mainly two types of life insurance policies: a term insurance policy and an endowment assurance life insurance policy. We know about the death benefits such life insurance policies offer, but we do not know about the other options they extend that can strengthen your overall financial position. A term insurance policy provides protection for a stipulated period of time like ten, twenty or thirty years. It pays you the benefits if and only if you die during the tenure of term insurance policy. An endowment policy on the contrary offers you a lump sum amount at the end of the tenure of the policy.
• Life insurance policy can be your tax saving instrument:
You can save income tax by investing in life insurance policies. This is not dependent on which plan you intend to buy. The total premium you pay on your life insurance policies in one year is the eligible amount for maximum income tax benefit of Rs 1.5 lacs per year under Section 80C. For tax-free proceeds on death or maturity of life insurance policy the said tax benefit is eligible under Section 10 (D) of the Income Tax Act, 1961.
• A tool for growing your personal savings:
If you are willing to choose a normal LIC policy or an ULIP (unit-linked policy), you need to pay premium instalments each month, which is higher in monetary terms than what it actually costs to insure you. This extra amount of money is invested. It accrues cash value over the time. This accrued cash can then be borrowed against the life insurance policy. You can also choose to sell it or you can draw cash-income from it.
•You may not qualify to get all the benefits later, so get the policy now:
Life insurance policies have uncertainties attached with them. Right now you may be healthy and you are paying premium instalments for life insurance. This might seem to be a financial burden on you. Tomorrow, if you suddenly become ill and you pass away, your family will need the maturity amount of your life insurance policy. So, it is crucial to buy this policy early in your life. If you buy it early, it would remain in force if your condition of health deteriorates in future. Insurance companies also offer you certain choice of riders or extra benefits on the top of your existing life insurance policy. These riders added advantage (for example: accelerated death benefit rider allows the policy owner to avail the policy’s death benefit if he has less time to live due to a critical illness).
• Security, reliability and peace of mind:
Men are mortal and death is inevitable. So, you can at least secure your family’s financial future. Even though life insurance is a small policy, still it would help you to remove your further worries and will increase your peace of mind. Do not underestimate the importance of life insurance in your financial affairs. Thousands upon thousands of dollars may be lost to you or to your family if you fail to arrange your life insurance properly. Indeed, the very survival of your family may depend upon the care with which you make the critical decisions about your life insurance.