KNOCK KNOCK!
Me: Who is it?
Life insurance (LI)
Me: Not interested.
LI: You may be right.
Me: What do you mean by, 'may be right'? I am quite sure life insurance is the last thing I want. And with there being so much confusion about life insurance, accident insurance and Unit Linked Insurance Plans (ULIPs), etc, I would rather not put my hard-earned money in it.
LI: Again, you may be right.
Me: Then, why am I talking to you?
LI: Because you 'may be' right is not the same thing as you 'are' right.
Me: So what is the truth? Go on. Tell me.
LI: Firstly, I think you have got it all mixed up. Life insurance and accident insurance are not the same thing. And, ULIP has life insurance and investment component to it.
Me: How am I to know all this?
Also read: A conversation with ULIPs
LI: It’s really simple. Far more simple than you can imagine.
Let’s look at an example: Say you make Rs 30,000 per month. Your age is 35 and you are the only earning member of the family. So, what happens if you die? Assume your family needs Rs 25,000 per month, increasing at an average 8 per cent per annum to accommodate inflation. Your insurance need is probably Rs 1.35 crore. Without this much money, how will your family survive? How will your spouse manage cashflows till she is say 85 years of age?
Me: Logic is all right but the figure is ridiculous. Rs 1.35 crore, you say?
LI: It is a probability; it’s not certain. Say you have investments worth Rs 25 lakh (excluding your primary home). Then perhaps your life insurance need is Rs 1.35 – 0.25 = Rs 1.1 crore
Me: That is still way beyond what I can afford.
LI: Well it might cost you about Rs 3,000 to 4,000 per month for now. I have assumed that your family will generate about 8 per cent from the funds in case of your death. And, if they are able to generate 10 per cent returns on the funds they receive from the life insurance company your insurance need is approximately Rs 61 lakh. That will cost you about Rs 2,000 per month. Over years this will also reduce by re-evaluating your life insurance need.
The need is different each year and in 90 per cent cases it tends to fall over time. Say in 10 years time you may actually not need life insurance.
Me: That is something I have not heard before. How is that possible?
Calculate: Are you adequately insured?
LI: Life insurance is to be treated like a virtual asset. It is a hedge – a hedge against the loss of your income and thus lifestyle to your family in your absence.
Think about this, If you had say Rs 2 crore of investments today, would your family be worried about their lifestyle in your unfortunate absence? Rs 2 crore is just an example. The point is if you have assets, your life insurance needs reduce. Hence it is important to build assets.
Further, life insurance also acts as a hedge to protect your family’s financial goals. Financial goals cannot be achieved via life insurance but the proceeds received in case of death are to be invested such that at the time the goal is to be fulfilled the money is available to your family.
If life insurance were to help you achieve goals you would need a lot more life insurance and for which you would pay huge amount of your hard earned money. Life insurance is a life risk management tool helping you build a virtual asset in case you don’t already have real assets. That is it !!
Me: Never thought of life insurance that way.
LI: You are right again. It is unfortunate that it is not advised correctly. Life insurance is a beautiful tool and term assurance is the best deal.
Life insurance is essential and if you have a family, dependents etc it is important to at least have a customised calculation done on your life to find out whether or not you actually need life insurance – the answer might just surprise you either way.
Find out: The right policy for you
Illustration: Vaibhav Shirke
Disclaimer: The contents of the above article are the intellectual property and copyright of the author, Kartik Jhaveri. No part may be used or reproduced in any form or manner. If you choose to act upon the information contained in the above article it is at your own risk. This article is purely educative and you are strongly advised to consult an expert prior to taking any significant decision.
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