LIFE INSURANCE BASICS

Life insurance investment

Investing In Life Insurance

In recent times, there has been growing awareness about life insurance products and the various benefits they offer. An insurance policy is primarily meant to protect the income of the family’s breadwinner. The idea is, if the breadwinner dies, their dependents may continue to live comfortably. The circle of life begins at birth, followed by education, marriage and eventually, after a lifetime of work, people look forward to a life of retirement. Our finances too tend to change as we go through the various phases of our life. It is important to remember that with time, the needs and aspirations tend to change and we have to ensure that there is a suitable, dynamic financial plan in place to take care of both the certain and the uncertain phases of life. Life insurance is a tool that helps you achieve this objective.

Why Life Insurance?

Very often it is said, that before the worry get into one’s head, it is better to get your life insured. Why? Because life insurance provides protection to the family - the family gets a specified amount of money in lump sum when they need it the most, that is, when the breadwinner is not around. While the emotional loss cannot be mitigated, the amount received from an insurance company can help take care of the family’s financial future. Apart from this, various types of life insurance policies could provide financial stability even when you are alive through periodic payments of a portion of the insured amount, by providing returns for your invested corpus, or even by helping you to reduce taxes. 

Advantages of Life Insurance

• Risk Cover: Life today is full of uncertainties; in this scenario life insurance ensures that your loved ones continue to enjoy a good quality of life against any unforeseen event. 

• Planning for life stage needs: Life insurance not only provides for financial support in the event of untimely death, but also acts as a long term investment. You can meet your financial goals, be it your children's education, their marriage, building your dream home or planning a relaxed retired life, according to your life stage and risk appetite. 

• Builds the habit of saving: Life insurance is a long-term contract where as policyholder, you have to pay a fixed amount at a defined periodicity. This builds the habit of long-term savings. Regular savings over a long period ensures that a decent corpus is built to meet financial needs at various life stages.

• Growth in investment amount: Some policies like Unit-Linked Insurance Plans(ULIPS) offer an opportunity to participate in the growth of an economy by investing in various avenues including stocks.

• Tax Benefits: A number of insurance plans allow you to offset the premiums that you pay for life insurance in your taxable income. The maturity amount may also be non-taxable. Insurance is widely suggested by financial advisors to reduce your tax burden.

Factors to be considered:

Although life insurance plans come with great advantages there are a few things that we need to avoid in order avoiding inconvenience later.

Buying plans that do not meet your needs/goals: For example, let’s say you prefer periodic payments from the policy to take care of your intermediate financial needs. In this case money back plans may be ideal for you. But does it make sense if you buy term plan instead of money back plan? No. So choosing the wrong product for the wrong purpose is a common mistake that people do.

Premium paying ability: Many times it so happens that an attractive policy with high coverage amount encourages us to buy policies that we cannot afford. We should be careful while choosing insurance so that payment of premium does not become a burden.

Not evaluating your Risk Appetite: A concrete concept of investing that most investors don’t understand is that to earn higher returns, the risk taken is also higher. There are chances that you might lose your hard earned money by taking higher risk in pursuit of high returns. Especially when investing in ULIPS, we go blindly by the word of the brokers / agents, and never try to understand the risks involved which is dangerous for your invested amount.

Things to remember

Timely payment of premium is necessary for any insurance plan. Continue paying premiums through the entire  Premium Payment Term, discontinuing premium payment can not only lapse the life cover leaving you unprotected, but also depletes fund value in case of ULIPs. Keep check on your life cover, as you progress in life you should upgrade your life cover to make sure that your family does not have to compromise their standard of living in your absence.

Buying Life Insurance is not rocket science. However, there are hundreds of insurance products, which make the choice difficult for an investor, but keeping it simple will help avoid unnecessary risks. As we have seen above, there are several benefits to this effective financial tool. But like any other financial investment avenue, due care has to be taken while choosing the right option for your needs. Therefore it is very important that you weigh the insurance plan against to your current financial abilities and future financial requirements. If used wisely, life insurance can prove to be a very good tool in your pursuit to achieve financial stability.

 

Disclaimer: This article is for general reference reading, please take an expert’s advice in case of doubt.