Life Insurance and it's Benefits
Life assurance, life insurance… These two terms are commonly interchanged but
they can mean one thing – financial security for your family in the event of
your untimely loss. Upon your death, life assurance will kick in and pay your
beneficiaries the sum insured.
Purpose of
Life Assurance
Life assurance can be bought to address a variety of needs:
- Replacement of Income. Your family depends on your income and your
death will mean a loss of a considerable portion of the family budget. Life
assurance, when planned carefully, can be used to replace this loss of income
for years to come. This is particularly important if you have young children or
aged parents who depend on you for financial support.
- Mortgage protection. Buying a house is one of the biggest
investments you will make in your lifetime. You would want to make sure that
this investment is sufficiently protected, even when you are gone. Your family
may not be able to keep up with the mortgage payments following your lose and
may have to face the prospect of foreclosure. You can use life assurance to
cover your mortgage so that your family does not have to worry about the
mortgage payments. There are life assurance plans that are specifically
designed to protect your mortgage.
- Payment for End of Life Expenses. Your loss may also result in
hospital bills, as well as funeral and burial costs. These expenses may be a
heavy burden for your family to carry. The life assurance proceeds can be used
to cover end of life expenses.
- Fund your child’s education or retirement. This
is especially true for cash value or endowment policies where you can expect a
specified amount after the coverage period. You can schedule the length of the
policy to coincide with the time your child will go to college or your
retirement. Even with a non-cash value coverage, your family can use the
proceeds to fund your child’s college education.
- Security for Companies and business. Partnerships and
businesses can make use of life assurance to fund agreements. Upon the death of
a partner, a company officer or valued employee, the company can make use of
the proceeds to protect themselves from the financial loss – to buy out the
late partner’s share in the business or to compensate for the loss of
experience and skill that the late employee or officer contributed to the
company.
The Amount
of Life Assurance You Need
It is important to determine the right amount of insurance.
Buying too little will mean that your family will not have enough to fully
compensate the loss of your income. Buying too much will mean that you may be
paying for coverage you don’t need.
You need to calculate how much your family needs to live and
approximately how long they will need this support (the number of years before
the children can become financially independent). The average cushion is 2
years
Here are a few simple guidelines to determine how much
insurance you’ll need:
A. Determine your short term needs. This includes hospital bills
and funeral expenses, estate taxes, loans (credit cards, car loans and so on),
as well as a contingency fund for emergencies.
B. Calculate your long term financial requirements. This
includes the funds for your child’s education or the funds you will need to
fully pay your mortgage.
C. Determine the current monthly
expenses of your family and multiply by 12. This should include your basic
expenses such as food, clothing, utilities, rentals, transportation and travel.
Then, multiply this number by the number of years you reckon your children will
be dependent on you and your spouse.
D. Calculate your available resources –
savings, life insurance you currently have (especially one given by your
employer), stocks and bonds, etc.
E. Add up A, B and C. These will refer
to your financial needs. Subtract D from this total to determine the amount of
life insurance you will need to buy.
Underwriting
for Life Assurance
By “underwriting”, we refer to the process by which the
insurance company evaluates the kind of insurance risk you present. This is how
the insurance company determines the premiums they will charge. The insurance
company will look into your age, gender, health condition, your occupation and
lifestyle, your family’s medical history and even your driving record and
credit rating. This means that premiums for different individuals will also
differ.
Pre-existing medical conditions may either be excluded from the
cover, or, the insurance company may charge you with higher premiums. A
pre-existing condition may also be grounds for the insurance company to refuse
to provide you with coverage.
A special
note on your smoking habit. If you smoke, you can expect your premiums to
increase considerably. A smoking habit is considered a health risk factor that
can cause certain kinds of cancer, heart disease and other health
complications.
Kinds of Life Assurance
- Term Life Assurance. This kind of product
assures of a payout when death occurs within the life of the policy. The
coverage is only for a specified number of years, after which, the Insured can
opt to allow the policy to terminate, renew the policy for another coverage period
or convert the policy into another kind of life assurance product (if this is
allowed).
- Whole Life Assurance. This provides
coverage for the Insured’s entire life (although some policies have a maximum
period of 80 to 100 years of age).
- Life Assurance with Endowment. This
promises a payout either when the Insured dies within the coverage period or
upon the maturity of the policy. This is ideal for those looking for a savings
vehicle for a child’s education or for retirement. The coverage is for a
specified number of years.
- Joint Life Assurance. You can opt to get
coverage for both you and your spouse. It can either be a first-death or last
survivorship cover. For first-death, the payout will be when either spouse pass
away. Last survivorship cover will mean the payout is when the surviving spouse
dies.
Anand Khemka+91-9910936925+91-8287041341
