(This article is contributed by Girish Sidana, a regular reader of www.drvijaymalik.com, who wants to share his learning about life insurance, for the benefit of other readers & the author. I appreciate the time & effort put by Girish for our benefit and thank him on behalf of all the readers.)
Let us get the basics first – There is no relationship between investments and insurance.
Life Insurance: An Insurance or an Investment
By definition, investment means creation of an asset with the expectation of it appreciating in future to create wealth. Insurance is the transfer of the risk of a loss, from one entity to another in exchange for payment. In simple terms investment is a saving for future and insurance is an expense to secure future.
It may seem paradoxical to some but sooner we understand it, the better it is. Unfortunately, in our country, since long investment and insurance have been mixed well and fed to uninformed consumers like us, courtesy oldest insurance institutes in India.
I would not fully blame them. Given our social thread, talking of loss of one’s life during his prime has been a taboo. Therefore, insurance institutions did not have a choice but to mix insurance products with better things. Just like grandmothers used to mix honey in bitter medicines, to give to small children. Insurance institutes found savings (read investments) to be the best honey to mix with the bitter medicine of covering the risk of loss of life.
Life Insurance: “Why”
Every person needs insurance to take care of his/her dependent family members after loss of his/her life. Therefore, it is important to understand that one needs life insurance if he/she has financially dependent family members. Let me state here that loss of human life is the biggest loss for near and dear ones. Nothing can fulfill the same. However, financial dependence on this person can make matters worse.
Life Insurance: “When”
To simplify the matter, it is good to understand that one should take the first life insurance policy the day you get your first dependent family member. The easy way to state this is:
- Take your first policy the day you get married. This is the day you get your first dependent family member in your life. Take this policy for a period up to, which you think you will be working/earning. Even if your spouse is working, this is the day your new family is starting, so the best day to start a life insurance.
- You should take another policy the day your first child is born. You now have another dependent family member and need extra cover. Assume a period until which this new member will be dependent on you and that should be the period of this policy (let us say 25 years. It is assumed that the child will start earning on his/her own at that age). However if 25 years is more than your balance age of working/earning life then reduce this period to maximum up to your end of work/earning life.
- Similarly, you need to take one more policy on the birth of your second child and decide the period in the same way. Repeat this if you are expanding your family further.
Once you have taken these policies, review them periodically (say once in 5 years). Look at your dependent family members at each stage. If you think dependents may have more need than anticipated, buy more insurance cover.
Moreover, keep a tab on your assets. If you have made more money than needed to live a reasonably comfortable life, you may not need insurance policies any more. Whenever you see this happening, do not shy away in discontinuing your policy. Do not think that the premium paid has gone waste. Since you have survived this period the premium paid has justified itself. There is no harm in discontinuing the policy at any stage. I am emphasising this point because lot of people are not able to digest the idea of discontinuing a life insurance policy. They think that premium paid till date will go waste.
Do not go by the popular Human Life Value (HLV) calculators on insurers’ websites. Amount of insurance cover is not a function of your earnings. It is a function of your expenses.
Life Insurance: “What to buy”
The WHAT of life insurance is very simple. Just buy a term life insurance policy. Do not look at anything else. No Moneyback. No endowment. No ULIP. No policy by any other name. Plain and simple term life policy is the answer. Do not even look at any riders on term life policy. The logic is simple. Vanilla term life insurance policy comes to you at the most attractive premium.
Life Insurance: “How to buy”
The HOW of life insurance is even simpler. Just go online and buy from the website of the insurer. However, you may want to compare premiums at a comparison website. Do not try to take opinion of your insurance advisor/broker. He will never suggest you to take the term life insurance in first place and will keep giving justification of his service for you not to buy online. The experience of buying online directly could be slightly painful as there will be no one to take you through the process. However, it is more than it’s worth to go through this pain.
This is my learning and experience of life insurance, which I have gained through various financial planners whom I have met or read them. It also includes learning from the pushing life insurance agents and the mistakes done by me before understanding the basics. I welcome readers’ comments, suggestions and their learning.
– By Girish Sidana
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