Should You Really Buy a Life Insurance Policy?

The answer to the question is YES.

Of course it is the most unpleasant thing to consider, but still the answer is YES. Every person having dependents must buy a life insurance. Life Insurance protects the people that are financially dependent on you, so that your dependents like  parents, spouse, children or other loved ones would not face financial hardships if you die. Life insurance should be the first in your priority list while planning your finances.

Let’s discuss what kind of plan you should buy and how much insurance you should buy.

It doesn’t make sense for everyone, but buying insurance is a high priority task which must be fulfilled before you take up any further step in financial planning.

You may have large valuable assets which you think will take care of the financial needs of your family in your absence, but still you need to buy insurance, first to take care of the loans you would leave behind so that you can pass on the assets as assets only to your dependents. You can’t imagine, in your absence, your dependents to sell off the asset to make the ends meet.

What is the proper age to buy the insurance?

Insurance should be bought when you get your first pay cheque. That does mean as early as possible. There is reason for supporting my statement. When you are young, the cost of insurance is low, means the premium will be cheaper. As you grow older, to buy same insurance, you have to pay more in the form of premium. So there is direct relationship between your age and cost of insurance. So buy it when it is low. So, make proper plan if you have kids, secure your family.

Is it Investment?

The straight answer is NO. Don’t look at insurance as your investment, it simply doesn’t make sense. There are some insurance products which are treated as investments like pension plans, ULIPs, but the cost incurred in covering your insurance are much higher and the returns you get are much lesser than compared to pure investment products. For the people who don’t try to learn about the various financial products for investments and lack financial discipline can buy such plans. But it will cost a lot.  

Term Vs Endowment policy

Insurance companies love to sell the endowment or ULIP policies and promote them by giving high commissions to agent. The insurance companies offer loan on the policies which again come at a cost.

Term insurance is a simple and pure insurance plan and very very cheap compared to endowment plans. At the end of term of policy, in case of non-event, the policy holder doesn’t receive anything whereas in case of death of policy holder the family receives the sum assured. These policies just offer coverage and that’s why they are much cheaper.    

Recommended: Investing Rules: Think Twice Before Investing in Share Market

How much insurance do you need

That depends on how much money your dependents will need in your absence. But still, the sum assured can be calculated considering following factors:

1. Do you have any debt?: All your debts must be fully paid, along with interest, including home loan, car loan, mortgages, credit cards etc.
2. How much is your Income: This is the major determinant in deciding the sum assured, even considering the inflation, for rest of your family’s life.
3. Do you have any future obligation?: The future obligation may include education of children, marriage of daughter, regular monthly income for spouse in her old age etc.

The factors discussed above may help you decide whether you need insurance, the type of insurance and the amount of sum assured. The personal finance experts have the thumb rule to decide the sum assured for a policy holder but you are the best judge of your own situation. It is better for the individual to decide his own sum assured considering his debts, the no of dependents and their monthly expenses (including their lifestyle expenses) and future obligations.

One more thing you must remember is that, insurance should be bought as early in life as possible.