A term insurance plan serves the purpose of securing not only one's exi...
Should I have just one type of Life Insurance policy or is it advisable to have a diverse and mixed bag of insurance plans?
Often, people shy away from taking decisions with pertaining to insurance products thinking that it is too complicated for them. Few people dare to cut through the jargonised brochure language and manage to buy an insurance policy by themselves only to further meet yet another serious dilemma – whether to have a single type of insurance policy or maintain diversity in type of policies? Well, there isn’t a standard formula for this and the answer is very subjective. The insurance portfolio of an individual mainly depends on how one perceives his/her daily needs and matching the right type(s) of life insurance policy that meets his/her needs. But, more often than not, people are not fully aware of their financial needs and hence get further confused over the type of life insurance policy they should avail.
Insurance is a product which should be purchased only after self analysis of financial requirements. It is true that analysing one’s financial requirements is not a cake walk, but it is not an impossible deed. With a little thought and endurance, it can definitely be done.
Almost all insurance companies have a ‘Need Analysis’ calculator which they use during the first meeting with the customer. Without getting into the details of how to do a self analysis of financial requirements, I want to highlight the insurance products to be purchased once you have identified the need. This step is equally, if not more, critical and important in nature and equally challenging. It is important to understand how to choose your portfolio once the financial needs and requirements are identified.
Global statistics suggest that on an average, an earning individual buys 7 Life insurance policies in his entire lifetime. But there is no data which shows the types of life insurance policies an individual purchases in his lifetime. Ideally every individual should aim to have a combination of at least 2 to 3 insurance policies. In my opinion, any Portfolio should be a mix and match of various products, of different tenure and sum assured, depending upon the requirement of course. Moreover, as the saying goes, you should never put all your eggs in just one basket.
Few of the common types of life insurance policies which are must-haves are:
1. Term Plan- This is the basic and pure form of insurance. Once the individual starts earning and contributing to the household, he/she should immediately avail a term insurance policy for the maximum policy tenure available. As time passes by and age + income increases, the individual should increase the term cover by buying more term plans. The premium for such a policy is the lowest when compared to other types of insurance policies and it is also cheap if taken at an early age. If you are earning member of your family, then a term policy guards the entire family from a possible financial loss in case of any unfortunate event. Since Term plan is the cheapest life cover solution, it is said that each and every earning member must have a Term Plan.
2. Whole Life Plan- If you the sole earning member for your family then you should have a Whole Life plan to get a lifelong coverage. Since you are the ONLY earning member for your family, your family needs to have a protection and savings cover for the rest of their lives. To achieve this, you can take a Whole Life Plan which is basically an extended term plan with unlimited term such that your family would get money whenever you die.
3. Decreasing Term Plan- has been recently very popular because increasing number of people are availing liabilities such as a Home loan. This is because, if you die before you repay your loan, then the burden of your loan would fall on your family and they would have to repay the same on your behalf. So often the bank or loan disbursing company will insist that you avail an insurance cover to take care of your loan. So, if you have a Decreasing Term Plan, such that the sum assured decreases each year along with the decreasing loan liability, then your family would be saved of this burden.
4. Pension Plan – also referred to as an opposite of insurance comes extremely handy when the individual has passed his income earning age. To create income post retirement, pension insurance plan is the perfect solution. It helps the individual to remain independent and he/she does not have to stay at the mercy of other members for their expenses or requirements.
5. Endowment Policies - For any asset building along with reasonable cover, this type of plan comes very handy. Even though an endowment plan provides low interest but they offer assured returns. It is basically a savings instrument with life cover attached to it. Risk-averse people can look it as an investment venue which offers guaranteed safety of capital.
6. ULIP, or Unit Linked Insurance Policies - When investment becomes almost as important as protection and returns are measured as against market performance, then ULIPs are the best solutions. Unit-linked insurance policies provide market linked returns along with death benefit of the life insured.
As each of these insurance policies has a different purpose and benefit associated with it, the timing and the premium that goes into these policies should be taken with utmost care so that they do not disturb the monthly expenditures. Choosing an ideal mix of Insurance Policies should be done keeping in mind the responsibilities and lifestyle one has. Whether one is looking to protect his family from his untimely death or investing for his child’s future or his own retirement, the above insurance products will cater to all such needs. There is a huge tax benefit on premiums paid towards life insurance as well as the sum assured received on maturity of the policy. A life insurance policy is a safe and healthy savings option when compared to other financial products. The flowchart below will help one decide on the right policy to purchase based on his purpose.
Broadly one can classify his requirements into protecting his family when he dies or planning for his children’s careers or retirement. Whether it is protection or planning needs there are suitable insurance policies that suffice the need appropriately. For Planning needs Endowment, Pension or ULIP will be a good choice based on the risk one can afford to take. For protection needs the traditional Term or whole life policies are must.
Since you have such a vast variety of life insurance policies available in the market, you need to decide on your priorities and then choose from the wide variety and select the plan you would like to invest in. Always remember to avail 2 to 3 types of insurance policies, as mentioned earlier to maintain a diverse portfolio.