Saturday, May 8, 2010

ISIS (Finishing School) Morning Walk Sessions -Need for Life cover

Why do you need a life Insurance ?
During my younger days I was of the firm belief that life insurance is something that I will not take. Money cannot bring back the comforts that I would have provided. However as I started to understand the risks that I had created to my family I started creating wealth for them, still living with the theory of not having a life cover. Foolish it is however I was lucky to be blessed with wealth over a short time and created safe investments that will take care of my loved ones, thinking that I have done my bit to save them from losing out in case my systems failed.
The other day I read a story of someone who had similar thoughts. He had accumulated wealth, bought houses and land. All safe investments.
One day he met an accident and went into coma. He was admitted in the best possible hospitals and remained in that state for two years. By the time the family had sold all the investments and started borrowing from people for the treatment. One fine day he left for good and by the time family had spent everything that he earned for them.
Had he invested on a large term cover, that money would have come to the family after his death to ensure future for the family.
I am not selling insurance here.
What is a Term Policy?
Term life insurance policy is the cheapest form of life cover.
If your main objective is the financial security of your dependents, in the event of death then you should choose term insurance policy. It comes cheap and also supplemented by tax benefits and investment-related advantages. A term life insurance policy is a pure life cover.
There will be no investment benefits attached to it. This is the cheapest form of life insurance cover. However, generally insurance agents do not recommend this as the commissions from such policies are low. It comes with the advantage of low premium and flexible premium payments.
A term life insurance policy covers a person against death for a limited period or term. A term might be five, 10 or as decided by you and the insurance company selling the product. The premiums can be paid throughout the term, annually, half yearly or quarterly. In case of death of the insured person during the term, the nominee gets the sum assured. This policy is highly attractive because of the low premium and high cover it brings. The disadvantage(If you feel) is, in case the policyholder survives the tenure of the policy, there is no payout from the insurance company. The policy simply lapses after the term.
Term policies should be used as a finance planning and risk management tool. For example, if you take a housing loan for a long tenure, say 10-20 years, you can simultaneously take a term policy of corresponding value. The premium payable will be linked to the outstanding principal over a period of time and as such will decrease over the period as both the tenure as well as the insured amount decreases. In case of death of the primary earning member who is repaying the loan, the family does not lose the home as the insurance company will repay the outstanding loan amount.
Term insurance policies provide maximum cover at the lowest premium. Since the investment portion is divested, the insured is not required to pay a heavy premium. There is little to lose except the insurance cover in case you decide to discontinue the policy.
Separate the insurance and investment objectives. Term policies are also an inexpensive way of taking a short-term cover till your wealth and asset accumulation are to your satisfaction. When you are done, provide enough liquidity to you loved ones to ensure that they do not resort to desperate selling in case of an accident or suffer.
Term policies provide death benefit only for a specific period of time. If the policy expires, the cover also expires. As age increases, the premiums also increase. You must match the term with your needs. It should be ensured the dependents are covered until they can provide for themselves or the loan on a mortgage is repaid. It is advisable to start at a young age, because the premium is low in such cases.
You may wonder what I have done for me. I had ensured that I subscribe for the ex-service men’s contributory health insurance policy which I earned due to the long service rendered in Air Force for self and family to ensure sickness does not suck what I have created for them.
Created enough liquidity to least at least year for my daughter and son, till they start making things work for them.
I have taken large insurance policies, before someone educated me on term policies. Now it does not make much meaning as my wealth accumulation plan is complete.

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