Life Insurance

In the previous post, I discussed the importance of financial planning and the factors to consider for financial security.

An important component of securing yourself financially is insurance. In this post, I will look at the two major types of life insurance - what they are and what is the difference. I will also discuss how much insurance you need and what other types of insurance are available.

I have a Unit-Linked Insurance policy (ULIP) for life insurance. This means that the premium I pay is invested in stocks, mutual funds, bonds etc.

If something untoward happens to me, the sum assured + the market value of the units is paid to my family. Sounds good? Yes, but it is not good. At least not good for everyone.

Experts say that unless you have a family, especially kids, there is no need for Life insurance. After all, insurance is to provide for dependants when there is no bread earner.

So, all those fresh graduates joining organizations don't need to invest in life insurance. Yes, the earlier you take insurance, the lower the premium, which is the argument agents use.

However, from a pure financial perspective it doesn't make sense to invest in a life insurance plan when you don't need it. ULIPs also tend to have a lower sum assured and higher premiums.

Term insurance, or pure risk cover is what you should be looking at if you need Life Insurance. In term insurance, there are no returns (not even sum assured) if the claim is not made before the policy end date. Hence premiums are very low, while the cover amount can be quite huge. This is what you get when companies provide insurance or you get free insurance with credit cards/auto loans etc.

Then why do agents and insurance companies harp on ULIPs? Commissions, fund charges and other fees. Agents get higher commissions once a ULIP is sold (regardless of the the type of insurance, an agent gets some money for every policy he has sold throughout his career!), compared to term insurance policy sales.

Now that we have a basic understanding about ULIPs and term insurance, we have to answer the question of how much insurance we require. Again, experts agree that it should be around 70 times your salary!!! This takes into account sustenance of your family, education of children and associated expenses and also considers inflation.

For more detailed information, you could use one of the many free calculators available on the Internet, as in here, here and here.

Note: The above links are for information and not a recommendation of any sort.

Remember, you will also need other types of insurance - cars, home, home loans and health. We will look at them in the next post.