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Life Insurance Planning

Life Insurance is one of the most popular savings/investment vehicles in India. Ironically, it’s probably the least understood too. That’s also a lot of mis-selling occurs in this space. People buy policies that are not meant for them in the first place, only to realize much what a wrong move it was.

An insurance policy offers much more than just tax planning and investment returns. It offers you the ability to plan for unforeseen events that could affect your family’s financial profile adversely.

As is often the case, people tend to get carried away with the life insurance investments of others. You must remember that your financial profile and needs are different from that of your neighbour. And the same is true for your insurance needs. However irrespective of the differences, the number of dependents you have and their financial needs are the most important factors to consider.

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What Factors decide how much Insurance you need?

Issues to consider while evaluating the above factors include:

The wealth, income and expense levels of your dependents.

Their significant foreseeable expenses

The inheritance you would leave them and

The lifestyle you want to provide for them

STEP 1

Evaluate your LIFE INSURANCE needs

An extremely popular product, Life insurance offers a lot more than tax planning and investment returns. You are offered the ability to plan for unforeseen events that could affect your family’s financial profile adversely

Factors to Consider

The wealth, income and expense levels of your dependents.Their significant foreseeable expenses,The inheritance you would leave them andThe lifestyle you want to provide for them

How much Insurance?

Obviously the above factors don’t mean much unless they are quantified. A time- tested approach used by Insurance and Financial Planners globally is the capital needs analysis method.

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STEP 2

Understand the Key concepts

Risk Cover V/S Investment Returns

Insurance options range from low premium policies that offer almost no returns, to high premium ones that offer returns depending on the fund option you choose.
We recommend you buy policies skewed towards investment returns only if you are in high tax bracket, prefer to invest in low-risk, fixed-income options and have exhausted all the other such investment options available.

Whole Life V/S Limited Returns

As you grow older, the number of dependants may decrease (since children would be independent). Also, your wealth may reach a level where it can support your dependents’ financial needs in the event of your death.
You should therefore consider whether if you need to insure yourself for your whole life or for a limited term. Obviously, the cost of insurance for the latter is lower. We recommend you to go for a whole life plan only if you do not expect your wealth to ever reach a level where it can support the financial needs of your dependents.

ULIP V/S Traditional

Today, ULIPs are more popular than any other option. But your life insurance agent may be the one recommending you the ULIP. Before you sign the cheque, decide which is best for you : ULIP or traditional endowment

Tax Planning

The Premium paid for an Insurance policy also qualifies for tax deduction under section 80C of the Income Tax Act. But don’t buy insurance only to save tax.

STEP 3

Selecting a Policy

Calculate the Insurance you need

Consider the current expense profile of your dependents and the current wealth level of your family. Consider also the risk tolerance level of your dependents

Select your Premium Paying term

How long do you want to pay your insurance premium for? This decision depends on the following factors:
1) How many years of regular income you expect?
2) Level of your regular savings.
3) How much insurance premium you can firmly commit to
4) How long you want to be insured versus how long you expect to pay a premium for

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