Life Insurance is an important part of personal financial planning. The important question of what is the quantum of adequate insurance cover to be taken by individuals?
There is no hard and fast rule to determine the exact amount of insurance cover to be availed by an individual. It varies from individual to individual. Calculating the Human Life Value and determination of the amount of the insurance cover is one of the popular ways of arriving at the life cover. But one should also look at the family set up of the individual, his financial and non-financial commitments, number of dependents, his assets and liabilities, nature of life-style before we decide on the life cover for a person. In our opinion, one should have life insurance to provide the dependants with the same level of lifestyle even in the absence of the insured.
When we are convinced that life cover is important, the next question which immediately comes up is what kind of policies one should take? As we believe that life insurance is only a risk cover and it should never be looked upon as an investment, we strongly recommend individuals to go for pure risk cover policies, which are popularly known as "Term Insurance". The advantages of term insurance are:
Premiums are very low and the individual can have a higher risk cover.
Ease of understanding the products and there is no hidden cost.
So is it not worthwhile to look at various kinds of policies like endowment, money back, whole-life policy etc.? If you are an individual who can stick to fundamental discipline in your investments, term insurance would suffice. But we don’t live in an ideal world; therefore, we can look at other options like endowment and other money-back policies. But you should remember that the investment returns on these insurance policies, historically, has not been very high.
Another popular category of Insurance product which is being marketed very aggressively in the last few years are Unit Linked Insurance Plans, popularly known as ULIP's. ULIP's are insurance products which consist of risk cover and an investment portion. The investment portion can be linked to debt market or equity markets or a combination of both in India. The investment portion which is related to equity markets have given very high returns in the last 3-4 years and has helped the insurance companies to market ULIP as a magical product. But we should all remember that the upward movement of the stock markets cant happen forever and you have to temper your expectations going forward. If you are looking at ULIP's as a short-cut to investments in stock markets, it is not. We believe hat ULIP's should be taken by individuals who are able to wait for the full term and allow the investments to run for a longer tenure to fully capitalize it.
To conclude, we believe:
1. In our opinion, one should have adequate life insurance coverage to provide the dependants with the same level of lifestyle even in the absence of the insured.
2. Life insurance is only a risk cover and it should never be looked upon as an investment.
3. You should remember that the investment returns on insurance policies, historically, has not been very high.
4. We believe hat ULIP's should be taken by individuals who are able to wait for the full term and allow the investments to run for a longer tenure to fully capitalize the equity opportunities and also to absorb the high front-loaded costs.
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