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While there are five basic necessities of life – food, clothing, shelter, education and health – the sixth one, insurance, is slowly getting added to that list. Government is now offering multiple insurance schemes through banking channels and more employers too are joining the trend of protecting their employees financially by insuring them. Most of us buy the idea of life insurance, but do we have adequate life insurance? Though the younger generation is trying to catch up by purchasing term life insurance policies online, are they adequately insured? Let’s delve deeper into this.
Premium driven approach over coverage driven approach
If one has to point out one culprit about the much talked about under-insurance, it is this premium focused approach of insurance buyers that prevail. Employers treat insurance premium paid as a cost. Many individuals who buy insurance are more focused on the Section 80C requirement for tax-saving than the coverage. That makes the protection needs take a backseat. In the actual world however, the protection needs must be the driving factor while ascertaining the life insurance purchases.
The investment syndrome
“Individual look at insurance as an investment and like any other investments they are only focussed on return on investment,” said Jignesh Shah, founder of Mumbai-based Capital Advisors. Many first time insurance buyers want to know the returns the insurance policies offer. The idea of loss of premium as there was no claim in a term life insurance policy, is still difficult to digest for many.
The purchases of traditional endowment products or unit linked insurance plans (ULIP) make many go for inadequate insurance coverage. ULIP comes with a condition that it should have insurance cover at least 10 times the premium paid. This may sound a good condition. But in the real world many choose the sum assured at this level to ensure that maximum money is invested.
For example, when an individual agrees to pay Rs 50000 per year towards his ULIP premium and chooses Rs 5 lakh, being 10 times his annual premium payment he is not really addressing his protection needs. Either he has chosen to be under-insured or he does not need insurance. In the former he should raise his insurance cover or he should go for dedicated investment product in case of later to cut down his costs towards unwanted insurance. For some Rs 50000 may be a large sum to be paid for life insurance premium. But when you look at the death benefit of Rs 5 lakh, does that make any sense? How long it can feed your dependents? It is time to ask tough questions pertaining to one’s needs and analyse options available in the insurance market.
“If you are keen to take life insurance go for term life insurance. If you are looking for investments consider investments products like mutual funds, fixed deposits. As far as possible, keep insurance and investments separate,” says Jitendra Solanki, a SEBI registered investment advisor. For example, a 25-year-old non-smoker male can obtain a cover of Rs 1 crore for a tenure of 35 years by paying Rs 8300 per year.
The sum assured game
When an individual decides to buy a term life insurance policy, his estimation of his insurance needs is also important. The rule of thumb says buy a cover at least ten times one’s annual income. But this may not be sufficient. It does not take into account many factors such as inflation, rising income, loans outstanding. For example, Chandan earns Rs 10 lakh a year and has an outstanding home loan of Rs 50 lakh. He has a term life insurance cover of Rs 1 crore. Prima facie, the coverage looks good. But in case of an unfortunate death of Chandan, his survivors will only get Rs 50 lakh after paying off his home loan. Most employer provided life insurance covers too are restricted to the extent of three times annual cost to company. The life insurance covers offered on group insurance platforms by the government through banking channels too are not sufficient for most of the working individuals. Pradhan Mantri Jeevan Jyoti Bima Yojana offers sum assured of Rs 2 lakh only upon death of the individual.
How to ascertain the right sum assured
“One should consider her current income, expenses, future responsibilities and financial goals while ascertaining the quantum of life insurance cover,” said Solanki. If you are not sure how to go about it, you should use online human life value calculator to ascertain the right sum assured.
“If you are young and just beginning your career, simply buy term life insurance as it allows you to buy large life cover at a relatively low cost,” said Shah.
Securing your dependents financially should be your priority when you start earning. “When you buy a large sum assured your family is assured of the same lifestyle that they are enjoying today, even in case of an eventuality,” said Solanki. The focus should be on securing large life cover at a young age as the premium is low when the life assured is young. The new age term life insurance policies come with the optional rider benefits. You may want to enhance your cover depending on your needs. “You should ideally buy personal accident insurance policies separately. However the critical illness covers can be bought as a rider benefits along with term life insurance policy,” said Solanki.
Do you have adequate life insurance?
