By Rajesh Sud,
What is the best way to save for one’s future? For any kind of financial strategy, it is important to consider carefully what works best for your own needs and goals. Thus begins your hunt for a financial tool that offers the most competitive return and stability.
Life insurance is the only financial tool that offers the combined benefit of long-term savings, protection and tax benefits. It plays the role of income-replacement by offering financial protection. It also provides stability and completeness to an individual’s financial planning, drawn by taking into account the present and future value of assets and liabilities.
Life insurance, thus, becomes a must and the first step towards financial planning. But a life insurance policy is much more than protection against the unknown. It can provide you with cash value that accumulates over time or, in the long run, supplement your retirement income.
But before you make a decision on what life insurance policy to purchase, consider this:
* Understand why you need it: Do not buy a policy because your friend or relative says so. Life insurance is designed to provide families and individuals with financial security in the event of the death of a partner or parent. It can help pay for mortgages, children’s education and also fund your retirement. In short, if others depend on your income, you should strongly consider life insurance. Even if you do not have any of these needs right away, you still may want to consider purchasing a small starter policy, if you anticipate you will have them in the future. The younger you are, the less expensive your policy will be. Determine the amount of coverage you need: For this, you need to estimate your annual salary income, monthly expenses and any future, on-going expenses such as a mortgage or school bills your family will still need to fund after your death. Then you need to decide how much you can afford to pay now.
* Find the right type of policy: Once you have completed your calculations, it is time to think about the type of policy that best fits your needs. Today, life insurance comes in many varieties, but there are four insurance-policy types which might suit a first time buyer. These are:
a) Term – death benefits during a specified period of time
b) Whole – life-time coverage
c) Endowment – benefit is paid either on death or on a specified date
d) Annuity – life insurance with additional benefit to the insured on reaching a specified age, such as retirement
* Consult an agent advisor: Agent advisors provide an invaluable service starting with fact finding to providing need-based solutions. The relationship you develop with an advisor can last a lifetime. They can help start you off on the right track, and guide you through a lifetime of financial decisions.
* Know what you are buying: Any discussion of insurance will probably include words such as cash value, premium, maturity and more. To help you navigate through the sea of jargon, here are some useful terms to know when taking out a policy:
i) Illustration: Document showing a life insurance policy’s future values, including cash values and death benefits
ii) Benefit: Contractual cash pay-out and amount of insurance coverage agreed to by the insurer for the policy holder
iii) Premium: Payment made to an insurance company, in exchange for the agreement to pay the policy benefits
iv) Beneficiary: Individual or entity that will receive the benefit upon the death of the insured
v) Claim amount: Stated amount of the benefit that is payable upon death
vi) Cash value: Total of premiums paid to date plus accumulated interest, that is payable in the event of death or maturity, minus expenses and administrative charges
vii) Maturity date: Date upon which the policy pays the insured its full cash value.
Life insurance being a long-term contract, it is important that before purchasing any product, one should clearly articulate one’s financial objectives. One also must assess the amount of annual investment required to meet potential long-term needs and the risk-taking ability. These will help to decide what sort of a product is more suited to one’s requirements and circumstances.
The basis of a sound financial management strategy should be a well thought out insurance plan. Finally, it is important to repeat this exercise annually, so that you can plan for your changing financial objectives and requirements over a period of time.
(24.04.2014 – Rajesh Sud is chief executive and managing director of Max Life Insurance. The views expressed are personal. He can be reached [email protected])