LIFE INSURANCE – BASIC QUESTIONS
· It is important that you have life insurance before you start investing.
· Its main purpose is to protect the dependants of the insured from financial loss in the event of his/her death.
· The key to life insurance as a tool of financial planning is informed buying after doing a need assessment.
· It involves a mix of elimination and a cost-benefit analysis of life cover, premium and maturity benefits.
1. What is life insurance?
· Life insurance is the process of insuring your life for a fixed amount so that your family or dependants don’t face a financial crunch in the event of your death.
· You enter into a contract with an insurance company, which promises to provide a certain amount of money to your family (beneficiaries) as a lump sum on your death.
· In return, you pay premiums or periodic payments to the company over a given period of time.
2. Do I need life insurance?
· Most people with dependents need life insurance, except if they are super-rich and have more money than any policy can provide.
· You may be single without any dependents at present, but you could get a dependent family going ahead.
· Circumstances when you don’t need life insurance -
- No dependants – When you are unmarried, or no one depends on your income.
- Enough assets – When your assets can take care of your family in your absence.
- Spouse earns well – When your spouse has a good income and can sustain on it.
- Old or retired – When you are old or retired with grown-up family and no liabilities.
· Circumstances when you need to increase your insurance -
- Your parents retire – Increase your cover if they are dependant on you.
- You get married – Increase your cover even if your spouse works.
- You become a parent – Increase your cover to provide for the new member.
- You take a big loan – Take an additional cover equal to the loan amount.
- You start a business – Increase your cover to compensate for the lost job benefits.
3. How much life insurance do I need and for how long?
· The advantage of buying life protection early is that life insurance covers are long-term contracts and you pay a flat level premium throughout your policy term, although your life risk increases as you age.
· You will require enough insurance to give your family and dependants an income for as long as it needs, pay off your mortgage and other loans, and cover bigger costs like children’s college fees or their marriage expenses.
· If you have small dependants, or plan to have more children, you may want a policy that lasts till your youngest dependant has left school or finished college.
· If your dependants are older, lesser years of insurance may be enough.
· Some policies allow for a life-long cover, which helps avoid the dilemma of deciding on a specific duration (term) of the policy.