Life insurance is crucial for several reasons:

Compared to investment, few people appreciate the importance of insurance as part of their financial planning. The issue is how does one make sure the family doesn’t have to vacate the house after one’s death, the son need not drop out of college to support the family, daughter does not have to forget her plans to study abroad – if something happens to you. All these thoughts are worrisome. Then, why not pay a small premium and get a life cover. At least it assures sound sleep. Also remember that the earlier you insure yourself, the smaller will be the premium you will pay throughout your life. And that is not the end of the episode. We should review our situation periodically to assure that we are adequately covered.

  1. Financial Protection for Loved Ones: It provides a safety net for your family, ensuring they receive a payout to cover expenses, and debts, and maintain their quality of life after your passing.
  2. Debt and Estate Planning: Life insurance helps cover outstanding debts and estate taxes, facilitating a smooth transfer of assets to your beneficiaries.
  3. Education and Future Expenses: It can secure funds for your children’s education and support future financial goals such as homeownership or retirement savings.
  4. Peace of Mind: Knowing your loved ones will be financially protected brings peace of mind, allowing you to focus on enjoying life with the knowledge that they will be taken care of.

How much cover should I take?

The amount of life insurance coverage you should take depends on various factors, including your financial obligations, income, family needs, and long-term goals. As a general guideline, consider covering at least 5-10 times your annual income to provide adequate financial support for your loved ones. However, it’s recommended to assess your specific circumstances, such as outstanding debts, mortgage, education expenses, and future financial goals, to determine the appropriate coverage amount. Consulting with a financial advisor or insurance professional can help you evaluate your needs and select the right level of coverage for your situation.

Term, endowment, money back…. those terms! What are they?

Insurance plans fall into three categories: term, savings, and whole-life:-

Term life insurance, simply put, is pure risk cover and the cheapest. You pay the premium and forget about it. Only your dependants will get an amount equal to your cover if you die prematurely. Savings products (endowment, money-back, unit-linked etc) are the most popular insurance products in India for the returns they offer. They are costlier than term products because the premium is total of both insurance cover and savings part. The insurance company will invest the savings portion and give you returns in the form of bonus or periodic paybacks. If you outlive the policy term, you will get the insurance cover and bonus. Your dependants will get the insured amount and bonus accrued. Whole life plans are not popular for the simple reason that you pay premium well into your retirement and you don’t see a penny coming from it as long as you are alive. It is cheaper, bonus rates are higher, and serves those who believe in insurance for insurance’s sake axiom.

What is a rider?

A rider, in the context of insurance, refers to an additional feature or provision that can be added to a basic insurance plan for an extra fee. Riders are designed to customize or personalize insurance policies based on specific needs and preferences. Some relevant riders include:

  1. Accident cover: Provides compensation in the event of disability resulting from an accident.
  2. Double the sum assured: Offers a payout that is twice the coverage amount in the event of the insured’s death during the policy term.
  3. Waiver of premium: If the insured becomes disabled due to injury or illness, the insurance company waives future premium payments until the insured is able to resume regular activities.

These riders allow policyholders to enhance their coverage and tailor their insurance policies to better suit their individual requirements.

Mistakes in Insurance

Accident cover

This assures compensation if you become disabled in an accident.

Double the sum assured

If you die during the policy term, you will get two times your cover.

Waiver of premium

If you are disabled due to injury or sickness, the insurance company would waive all further premiums till you are able again.

 Mistakes in Insurance

Most prominent and biggest mistake (Don’t combine insurance with investment) – One common mistake to avoid is the temptation to purchase insurance products that also include an investment component. While it may seem convenient, these combined products often fall short of delivering optimal results in both insurance coverage and investment growth. They tend to offer mediocre returns on investments and may not provide sufficient coverage compared to dedicated insurance or investment products.

A better approach is to separate your insurance and investment needs. Choose insurance products that provide comprehensive coverage tailored to your specific requirements, such as life insurance, health insurance, or property insurance. For investment purposes, consider dedicated investment vehicles like mutual funds, stocks, bonds, or retirement accounts, which are designed to generate better returns over the long term.

By keeping insurance and investment separate, you can benefit from specialized products that are designed to excel in their respective domains. It allows you to have the appropriate insurance coverage to protect against risks while pursuing investment opportunities that have the potential for higher growth. This approach enables you to optimize both aspects of your financial strategy and work towards achieving your specific goals effectively.

  1. Avoid combining insurance with investment products as they often underperform in both areas.
  2. Separate insurance and investment products for a more focused and effective approach.
  3. Choose dedicated insurance products for comprehensive coverage.
  4. Opt for specialized investment vehicles for better returns.
  5. Don’t settle for mediocre results by combining insurance and investment.
  6. Select insurance products tailored to your specific needs.
  7. Use dedicated investment options to maximize growth potential.
  8. Ensure adequate insurance coverage without compromising investment goals.
  9. Avoid the limitations and drawbacks of combined insurance-investment products.
  10. Optimize your financial strategy by keeping insurance and investment separate.

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