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LIFE INSURANCE: Your own financial planning tool


India has a lower Insurance penetration rate of only 3.7% as compared to the global average. About 988 Million Indians constituting 75% of the Indian population are not covered by any sort of life Insurance.  If you are one of those 988 million citizens or already have life Insurance without proper knowledge regarding which policy to choose and believe that Life Insurance is expensive or you are too young or old to purchase one, We bring to you the ultimate guide to choose your perfect policy and break all your myths! If you are someone who believes in Personal finance and wants a secure future with essential financial planning, Life Insurance can be an optimum tool for you with multiple benefits. Life Insurance requires policies to be chosen keeping in consideration the long term and short term financial goals. If implemented with a structured approach, it can serve a broad spectrum of needs based on the objective with which the life policy is being taken. The usual purpose, as we all are aware of, is to meet uncertain financial needs for the dependents.  Choose the perfect Insurance policy The first choice should be made for the term of life insurance, is for the entire life, or a specific term policy. Whole life insurance compensation in case of death of the insured anytime to the depends, however, term insurance, being cheaper than life insurance compensate only for the particular term. Hence, the term Insurance is the most economical one. But term Insurance forms a part of Life Insurance, and not the entire life Insurance itself. It is stated as life insurance for a fixed period of time that offers financial protection in the form of a sum assured to your family members if something unexpected happens. On the other hand, whole life Insurance demands high monthly premiums but it also offers multiple benefits as compared to term insurance including flexibility, tax-deferred investing, and payment of policy amount to the dependents regardless of whether the policyholder dies.  Most term plans offer solutions tailored to fit a variety of situations: 1. If you want a plain old-fashioned policy, you can choose a plan with single premium options that offers your family the entire sum assured after your death. The sum assured should be at least 15-20 times your annual income. 

It's good to plan for your dependent source of Income after you die, but Single premium plans might also help you to cover your long term care needs till you die and the remaining tax-free amount goes to your loved ones. Aren’t these SPLs worth investing in with so much flexibility regarding the use of your monthly premiums! 2. Apart from the first option in place, you can also get an add on with accidental cover. While it only adds a little premium amount in your monthly payments, it protects you from a range of uncertainties, by offering stretched out benefits with a lump-sum payment to your family.

You can even be ensured against Critical Illness such as Cancer, as health insurance doesn't usually cover critical cases. 3. If you want to ensure that your family gets monthly payments as well as the sum assured after you die, Term plans provide a cover for them as well. This can ensure that your dependents continue to live with the same lifestyle you wanted them to have. However, keep into consideration the income tax implications before choosing such a policy.

4. Flexible plans where you can choose how you want the Insurance companies to pay are becoming the most preferred ones due to the flexible multiple combinations of a lump sum as well as monthly payments in the picture. 

We hope, now you know that rigid Insurance plans are a thing of the past and now the policies offer flexibility, tax benefits, cope up with uncertain events and ensure a secure future for your dependents and family.  Apart from your policy choice as well as the financial objectives you are inclined to, you can consider your age before choosing the appropriate policy. If you are young and unmarried, old fashioned SPLs can help meet your purpose. As and when you get older, you should choose a term plan that can increase your risk cover with increasing dependents, or decrease it with fewer dependents. Choosing team policies with the lowest premium is not the right choice to select a Life Insurance scheme. Usually, guardians purchase policies in the name of minor children in order to low premiums but that doesn't make sense till the child starts earning. In order to choose the perfect Life Insurance policy for you, compare various policies and prices across online mediums and choose just like you choose a product before you order it online. Convenience is also a key and essential element to be considered.  Apart from this, if you are confused as to which insurer you should purchase a policy from, you should consider the credibility and integrity of the particular Insurance company. You can consider other factors such as factors such as Claim settlement ratio, corporate governance record, solvency ratio, assets under management (AUM), and instances of violations of IRDAI norms. Have you ever wondered what determines your Insurance premium?

It is determined by the type of plan undertaken, the sum assured, your age, policy tenure, health ailments, and smoking habits. Human Life Value (HLV) is the most popular method used to calculate the sum assured based on your current and future expenses, present and future earnings, and age. The key steps involved to estimate the same include the following:

1. Estimate the insured’s remaining lifetime earnings, meaning average annual salary and potential future increase.


2. Now, subtract a reasonable annual income tax and living expenses. This provides the actual salary needed to provide for family needs, minus the presence of the insured. As a rule of thumb, this should be close to 70% of pre-death income but might vary with family spending behavior.


3. Determine the length of time for which earnings will need to be replaced. This time period could be until the dependents no longer require financial support.


4. Now, select a discount rate which is usually taken as the rate of return on U.S. Treasury bills or notes


5. Multiply the net salary needed by the length of time needed to determine the future earnings. Then, using the assumed rate of return, figure out the present value of future earnings.

This is how the sum assured and the premium requirements are assessed which can also be calculated using online calculators available for calculating the same. Concluding, Life is important to be ensured as it adds support to your families which you also try to find in terms of retirement benefits. Be judicious while choosing an Insurance policy as it is not just about money but support to your dependents. Take Informed decisions and we hope after reading this article you would not want to be a part of those 998 million Indians! Stay Safe!

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