Life Insurance – understand the basic concept and learn how to select the right insurance policy

What is life insurance?

Life insurance is a contract between an insurance providing company and the person whose life is insured. The insured person also referred to as the policyholder. This insurance contract defines the insurance claim amount, the beneficiary of that claim amount and the period of insurance. By chance, although one never wish, insured demise within the insurance period, the defined claim amount is given to the beneficiary from the insurer.

Ok, so this is what we understand as life insurance in principle. In another world, I would say this is the most precious and most important gift to give to your loved ones. And why I am saying this? that you will come to know and understand while going through the following read.

So now you must be thinking, When and why you require life insurance?

First, let’s discuss why you should have life insurance.

In a simple world, as I understand, you should have life insurance if you have one or more financial dependant on you.

Now, here you should understand precisely like whom you should count as financial dependant on you?

To this, let me explain to you with some easy to understand examples.

• in your family, you are the member who is responsible for fulfilling the financial need of all members, your children who are studying, your life partner is a homemaker. in this case, your partner & children are financially dependant on you. Because, In your absence, your partner’s & children’s financial need will not be able to fulfil the same way as it was in your presence.
• You are single and earning by doing a job or business, your parents are retired and not having any or sufficient income source, in this case, you should consider your parents as financial dependant on you.
• Now let say, your children are settled in life and achieved financial stability, you have secured funds for your retirement life, and you are going to have a pension for you and your life partner, in this scenario, you don’t have any financial dependant.

By summarising those examples, I would define a financial dependent as;

If you are fulfilling or responsible for anyone’s financial requirements and they don’t have their options in your absence, those should consider as your financial dependent.

If you have noticed, those financial dependents are always our loved ones. Who always stood by us at any point of life, in all-time whether it is good or bad and with the only selfish goal of seeing us succeed in our life. They could be your parents, life partner, children, siblings or anyone so close to you.

One should understand that while supporting you in every up and down in your life and always standing behind you as your rock-solid support, they also let go of their wish and ignore the capability to become financially independent, which is a huge sacrifice in life. On a personal note, I must say, this only possible because of the unconditional love between you and them.

In your presence, there is no doubt that you will always take care of them, they even trust you for that. But in your absence, financially they will completely destabilize and even, may they are not in the situation to start earning.

Being the concerned guardian of your loved one, you don’t want to let that happen in your absence. And that’s why one should get himself or herself life insured and declare your financial dependant as the beneficiary in their life insurance. With this one advance arrangement in your presence, you will rest assured that in your absence that your loved one’s financial needs will keep fulfilled, and their life will be carried forward with the same dignity and pride.

So by this, you must have fundamentally understood that why you should get life insurance and when you should get life insurance. This decision is life practical and full of emotions & love.

Now I want to emphasize an important point, How to decide beneficiary in life insurance?

Your life insurance beneficiary should decide based on the list of your financial dependents.

• Let say one has a homemaker spouse and two studying children who are financially dependent on him. So in the general scenario, in one’s absence, the children’s financial dependency will shift to mother. And hence mother is a homemaker, she does not have any income source. Considering this, one should make a spouse as their life insurance beneficiary.

• In another scenario, the spouse, children and parents are in the family. Whereas, the spouse and children are dependents and the parents are having their income sources. Like, pension or any other form of earning and deposits that are sufficient to manage daily, occasional or accidental expenses for all coming years. Also, there are no financial liabilities to the parents, in such case, you can define multiple insurance beneficiary and bifurcate insurance claim amount in percentage between them. Like, for a major portion spouse should be the beneficiary as they will require more financial assistance and a minor portion for the parents, as their requirement is minimal to nill.

So, like this, one should wisely and practically evaluate the financial need of all your dependants and then only decide and make them insurance beneficiaries accordingly in your life insurance.

Now you must have got the idea and understood the benefit of life insurance. Yes, the major and the most important benefit or purpose is to make your financial dependant loved ones financially independent when you are not there to take care of personally in this world.

By this, one must have got the sense that life insurance is the must-have thing in life. Now what we will do? We will call anyone known insurance agent and buy life insurance as they suggest. Whereas, there are many points which you should first analyze and then decide your need. And accordingly, you should find & set the correct life insurance. You will find points in the policy document and compare, like with you can add-on riders like permanent disability, accidental death etc. That you should read, compare and decide the best suits your requirement.

But there are two points which I want to highlight.

Point-1: how long one should have life insurance? Or in another word, till what age one should have life insurance?

The decision of Life insurance depends on the financial dependant on us. And till the what age we should have, is also connected to that. When we evaluate the financial dependant, we should also consider the period(time) factor.

For example, a person is having children and a life partner as a financial dependant. When time moves, their children become self-dependent. When this stage comes in life, children come out of a person’s dependant list, and only life partner remains financial dependant. Now time moves further and the person gets retirement from work. At this stage, the person’s earning stops or reduced. so now they are becoming financial dependant on their children. So if the person will continue his/her life insurance and children don’t have then it will not solve the purpose of the insurance. The point is, in your absence, when no one is going to face financial crises, then there is no point in taking life insurance.

So all those stages of life need to be evaluated properly and decide till what age you want life insurance and at life’s what stages you need to increase or decrease insurance sum assured / claim amount. There is no thumb rule that we should have life insurance till we live.

Point-2: Which type of life insurance you should have?

When we start exploring life insurance products, mainly three types of life insurance products we fund.

1. Traditional life insurance policy – in this insurance policy, we pay insurance premiums till the insurance period we have decided and at the end of the insurance period, if we have not claimed the insurance amount, we received back all the premium amount. Means guaranteed maturity proceeds with minimal returns.
2. ULIP or equity-linked life insurance policy – This type of insurance policy also gives back the paid premium amount plus gives an additional return on the paid amount. But all these calculations linked with the stock market’s performance. if the market performs well you will get a very good return and if not then it will reduce your returns.
3. Term life insurance – This type of insurance’s objective is only to ensure one’s life. Hence in term insurance at the time of maturity, one never gets the paid premium return back. But during the insurance period, if one left, the insurance amount will be claimed by the beneficiary.

Traditional and ULIP types of insurance provide the befit of investment return and life protection, with a term insurance plan you can secure the financial future of your loved ones. There is no investment return in the term insurance plan.

So which type of life insurance we should have?

At first, we all will say ULIP or if we want to play more securely, we will select a traditional life insurance plan.

Here, my personal opinion and experience (obviously with a good amount of analysis) say, We should select a term life insurance.

Now you will say, why term insurance? There is a total loss. There is no return at maturity time.

Ok, keep calm, answer my simple question without any selfish thought.
Why are you taking life insurance? To make money or financially secure your loved ones in your absence?

Obviously, to secure our loved ones financially in our absence.

So why we pay extra for what we don’t need. exactly, when they add investment and return components in the product, they are charging for the same, and for that reason, your premium amount goes up. And to adjust the premium amount in your payable range, you will end up reducing the sum assured of the policy. You compromise with your loved one’s requirements.

Whereas in term insurance, there are no extra components, hence the premium amount comes down heavily. So in less premium amount, you get an extra sum assured compare to traditional or ULIP life insurance.

Ok, one of you will say I can afford an extra premium. Why should I not go for traditional or ULIP type of insurance?

Grate, you have spare money which you want to invest where you can get better returns, right?
Then why don’t you invest that amount in mutual funds directly? Why are you giving your money to a person who is anyhow going to invest that money in the market and will return you after deducting their profit?

Let say, you have an amount of 20,000 per anum budget in which you have to manage life insurance and investment. The term life insurance for one crore you will get at roughly around 12,500 for approx 30 years if you are at 39 years of age. With this, you start to invest the remaining 7500 in any good performing mutual funds for the next 30 years. In the 30th year, you will happily receive a good amount of returns in mutual funds, which you will surprise to know that the return amount far better compares to what has been projected to you while selecting a traditional or ULIP life insurance plan.

Are you not believing? That is good. One should always have the practice to check & confirm before accepting any financial illusion. Open your excel and start evaluating the above examples and make yourself believe.

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