Life Insurance is the compensation paid to your family for the financial loss due to your death. It does not account for the emotional loss, though. So, if you are wondering why you should buy life insurance, just note that life insurance can offer peace of mind even ensuring that your debts will not burden your loved ones in case of your untimely death. Thus, simply, anyone whose death would leave his family in a financial distress needs insurance!
Now, different people have different requirements, which changes over the various stages of life. Let us consider the various stages in an individual’s life:
Age 21 to 25 years - Career Start - Generally looks for investment and tax saving since he has disposable income
- Need - Savings, Protection
Age 26 to 32 years - Rising Income - Definitely has higher income. His priority is marriage, kids and asset acquisition
- Need - Savings, Growth, Liquidity, Protection
Age 33 to 45 years - Peak of his Career - Income is high but so are the responsibilities with kids’ education and loans for various requirements including home.
- Need - Investment, Security, Liquidity, Protection
Age 46 to 55 years - Decreasing Responsibilities - Approaching retirement and kids becoming independent
- Need - Investment, Security, Protection
Age 56 to 60 years - Retirement - Requirement would be lump-sum or regular amounts. Investment with substitute income
- Need - Liquidity, Protection
The thumb rule is once you become a parent, the income generating adult in your house should have life insurance coverage that will last until your youngest child completes college and starts generating an independent income. If you have large financial obligations such as high credit-card debt or a mortgage, you could use life insurance to ensure that debt is covered. Also, since life insurance is a very effective instrument for tax saving, many people use it as a tax saving tool, as well.
To determine if you qualify, most life insurance companies require you to undergo a medical exam depending on your age, physical condition and the amount you wish to be covered for, primarily to check for high cholesterol and blood-sugar levels. Prior to issuing a life insurance policy the insurance company will also check things such as your medical history, hobbies, credit rating, alcohol-related issues and driving record, just to name a few. Factors such as age, smoking, family history and prior health issues can also drive up the premiums on a life insurance policy.
Let’s start with the First Stage:
Age 21 to 25 years - Career Start - If you are in this stage, then you are just beginning your career. Responsibilities are usually minimal at this stage. Whatever you earn, is mainly to sustain your own lifestyle and also build a portfolio for your future.
Thus, what you need at this stage is Protection and Savings.
- The best protection tool from life insurance would be term insurance. It is for protection only.
- For savings, you could consider ULIP or endowment plans, depending on your risk taking capacity.
Age 26 to 32 years - Rising Income - If you are in this stage, then your income is bound to have gone up from what it was at the start of your career. Responsibilities are also rising with marriage and kids; asset acquisition is also of high priority.
Thus what you need at this stage is Savings, Growth, Liquidity and Protection.
- For Savings and Growth, you could consider ULIP or Endowment plans, depending on your risk taking capacity.
- For Liquidity, your investment needs to be planned out according to the stage at which you would require the liquidity. As in, you could opt for Money Back Plans, for regular cash inflow or you could opt for an ULIP, where the option for partial or complete liquidity is available after completion of three years.
- The best protection tool from life insurance would be Term Insurance. It is for protection only. The earlier it is taken, the better it is for the security of the family.
Age 33 to 45 years - Peak of his Career - If you are in this stage, then your income would almost be at an all-time high as you have hit the peak of your career. Responsibilities are usually very high with equal amount of personal life priorities like child’s education and borrowed loans.
Thus what you need at this stage is Investment, Security, Liquidity and Protection.
- For Investment, you could consider ULIPs or Endowment plans, depending on your risk taking capacity.
- For Security, your portfolio needs to be spread across various products. A mix of 2 or more products provides higher security.
- For Liquidity, your investment needs to be planned out according to the stage at which you would require the liquidity, that is, you could opt for Money Back plans, for regular cash inflow or you could opt for an ULIP, where the option for partial or complete liquidity is available after completion of three years
- The best protection tool under Life Insurance would be Term Insurance. It is purely for protection. The earlier it is taken, the lower is the cost of premiums and the better it is for the security of the family.
Age 46 to 55 years - Decreasing Responsibilities - If you are in this stage then your responsibilities would gradually reduce as you are approaching retirement and your kids are becoming Independent
Thus what you need at this stage is Security and Protection.
- For Security, your portfolio needs to be spread across various products. A mix of 2 or more products provides higher security.
- The best protection tool from life Insurance would be term insurance. It is for protection only. The earlier it is taken, the better it is for the security of the family.
Age 56 to 60 years - Retirement - In this stage, you have almost reached retirement or already have retired. There would be a requirement for lump-sum investment, with the amount received at retirement with substitute income
Thus what you need at this stage is Liquidity and Protection.
- For Liquidity, your investment needs to be planned out according to the stage at which you would require the liquidity. As in, you could opt for Money Back plans, for regular cash inflow or you could opt for an ULIP, where the option for partial or complete liquidity is available after completion of three years.
- Protection, at this stage would mean a regular flow of income from the lump sum investment. This would mean an annuity plan which would provide pension according to the option chosen.
Life Insurance requirement may be different for different people, not only depending on their life stage. Let us understand by the following examples.
- If you are married - Most families depend on one or two incomes to make ends meet. If you suddenly died, will your family maintain its standard of living on your spouse’s income alone? Probably not. Life insurance makes sure that your plans for the future don’t die when you do.
- If you are a single parent - As a single parent, you7rsquo;re the breadwinner, cook, chauffeur, and so much more. Yet nearly four in ten single parents have no life insurance whatsoever, and many with coverage say they need more. Thus they are either not insured or underinsured. With so much responsibility resting on your shoulders, you need to make doubly sure that you have enough life insurance to safeguard your children’s financial future.
- If you are a work-at-home parent - Just because you don’t earn a salary doesn’t mean you don’t make a financial contribution to your family. Childcare, transportation, cleaning, cooking, and other household activities are all important tasks, the replacement value of which is often severely underestimated. Could your spouse afford to pay someone for these services? With life insurance, your family can afford to make the choice that best preserves their quality of life.
- If you are retired - You have earned all your life and now just because you are not earning anymore, would you want to be a burden on someone else? Would you want someone to “look after” you even when you can afford to plan your life and haven7rsquo;t? Well, if that’s not so, then why not having a proper plan in place so as to take care of you. Life insurance would also help you to maintain your lifetime income. Life insurance proceeds are generally income tax free and can be arranged to avoid tax. Finally, if your insurance program is properly structured, the proceeds from your life insurance policy won7rsquo;t add to your tax liability.
- If you are a small business owner - Besides taking care of your family, life insurance can also protect your business. What would happen to your business if you, one of your fellow owners, or perhaps a key employee, died tomorrow? Life insurance can help in a number of ways. For instance, a life insurance policy can be structured as “partnership insurance”. This would ensure that the remaining business partners have the funds to buy the company of a deceased owner at a previously agreed upon price. That way, the owners get the business and the family gets the money. To protect a business in case of the death of a key employee, “key person insurance,7rdquo; payable to the company, provides the owners with the financial flexibility needed to either hire a replacement or work out an alternative arrangement. There are many ways to work out what suits your requirement the best.
- If you are single - Most single people don’t need life insurance because no one depends on them financially. But there are exceptions. For instance, some single people provide financial support for aging parents or siblings. Others may be carrying significant debt that they wouldn’t want to pass on to family members who survive them, (e.g., education expenses). If you’re in these types of situations, you should own life insurance because you wouldn’t want your loved ones to be burdened financially in the event of your premature death.
Hence, life insurance should be planned and the correct amount of life insurance needs to be purchased but only after evaluating the requirement and the need depending on your life stage, priority and capacity. If properly planned, the life insurance can be the answer to a sound financial planning for lifetime!
