Dharmesh Joshi, a 32-year-old married man with two children, has parents staying with him. He owns a term insurance policy of Rs 50 lakh sum assurance that he had purchased when he was 25 years old. It was taken with an intent to save taxes rather than seek financial protection for the dependents. So, when he recently met with his financial advisor who asked him about additional life insurance, Dharmesh was taken aback. “I already have a life insurance policy. How much more should I invest in insurance. I am planning to look at other investment options!” he asked.
This is a common approach that most of us have towards life insurance. However, our insurance needs to increase as our income and liabilities increase. The majority of us do not understand these changing needs and the importance of policies in our lives. What also comes with it is the general approach towards insurance policies: to buy and forget.
Insurance is considered a mere tax planning tool
Insurance, for most of us, is just a tax planning tool rather than an instrument of disciplined savings and a means of financial protection. Many of us may believe that our existing insurance policy will be sufficient to tackle uncertainties. The questions to ask are: Does my policy protect me from all eventualities of life like unfortunate death, illness, hospitalisation, or disabilities? Do I need to review my insurance needs regularly?
Buying more than just one life insurance policy as lifestyle changes is the best way to ensure one’s financial security.
A life insurance policy is the only tool which provides financial protection to you and your family in the eventuality of both, death and survival, and also in case of disability and illnesses. Some plans offer benefits such as the ability to access the policy’s cash value through withdrawals or pre-planned income benefits to fund a child’s education, marriage, retirement income or fulfilling any other dream of life. It offers tax-free loans for other lifelong savings requirements as well as lumpsum benefits on medical conditions.
The benefits of a second life insurance policy
There are several benefits of purchasing a second life insurance policy. First, different maturity dates for different policies allow an individual to evaluate the changing financial needs and liabilities at various life stages. It also helps one to opt for a milestone-based protection planning where a person can purchase life insurance based on the number of dependents and goals like marriage, children’s education, purchase of a property, etc.
It is important to note that with changing times, insurance plans evolve and offer novel and innovative solutions that may lead to the fulfilment of an individual’s desired outcomes.
It is imperative to consider the three thumb rules — level of cover, type of cover and tenure of one’s life insurance cover — before purchasing the additional plan.
Level of cover: It is important to outline the family's cash flow needs and financial goals. Add it all up to figure out the estimated amount of money that the survivors would need. Then look at the money that would be available – the total annual income of the family, long or short-term savings as well as existing life insurance policies (perhaps, through the employer). The difference between a family's financial needs and the available resources will help in assessing the adequate sum assured, which is just right for complete protection.
Salaried individuals usually avail of life insurance benefits offered by their employers. These policies are group plans and extremely advantageous within their structure. However, such policies usually fall short in meeting the complete financial needs of an individual as the sum assured may be lesser than required. It is, therefore, advisable to own a life cover that offers benefits to the tune of 10-15 times of annual income.
Type of cover: There are different types of life insurance plans designed to cater to different financial goals. While term plans fulfil the requirements of initial family stages and provide income protection; child plans help secure the future of the child by providing adequate funding at the time of education and marriage.
One can also opt for riders to enhance existing life insurance plans. Riders include additional benefits that can be added to an existing policy at nominal costs without changing the basic life insurance plan.
Tenure of cover: It is crucial to consider the current income level and the expected remaining years till retirement. Then calculate the insurance cover tenure to assess the actual amount required to replace the expected future income.
(Anil Kumar Singh is Chief Actuarial Officer, Aditya Birla Sun Life Insurance Company Limited)