Insuring your family

Insurance forms a vital part in your financial planning goal as it addresses the critical aspect of security for your family. As a concept you should have it in order to financially secure the life of your dependents after you, reports Sandeep Singh.

Insurance forms a vital part in your financial planning goal as it addresses the critical aspect of security for your family.

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As a concept you should have it in order to financially secure the life of your dependents after you. Hence the basis of having a life insurance should be derived on the aspects like—whether you need one, what type of insurance and how much cover is required.

“Life insurance serves the changing needs of an individual. A young couple would be more prone to buy a term plan or a mortgage cover but will look to save for the kids future education on his arrival,” said Rajesh Sud, MD and CEO, Max New York Life Insurance. “Products help in wealth accumulation and creating a retirement corpus along with offering protection.”

Do you need one?

If you are in your twenties and don’t have dependents then you should not be worried about having a life insurance cover unless you have liabilities to be taken care of (home loan, car loan, or credit card). However, as you grow in your life stage and you are in company of a lifepartner and kids then it becomes inevitable for you to be adequately insured with an amount that you think can take care of your family’s needs.

“Incase there are no dependents but your networth is negative, an insurance is a must so that your family does not get burdened,” said Surya Bhatia, Certified Financial Planner.

Tax benefit on insurance plans should not lure you to buy insurance. You should rather look at equity investment options or a home loan to save on taxes. They help you achieve your ultimate financial objective of building on assets and net worth.

Select one

Along with a term plan that caters only to the insurance needs, there are three traditional plans- endowment, money back and whole life that offer investment along with life cover. Traditional plans have low equity exposure of upto 15 per cent and they lack transparency. This is where Unit linked insurance plans (Ulips) score higher. They are bundled products that offer investment cum insurance.

“Ideally one should protect life through term but if one wants to have committed savings through insurance you can go for Ulips but for the long term,” said Bhatia.

Many advise against the bundled products. “Bundling two things affects individual performance and so mutual fund should be taken for investment,” said a Mumbai based financial planner who did not wish to be named.

Life cover in Ulips and traditional plans is significantly lower than what term plans offer and also if your Ulip lags in performance you won’t be able to switch your investments as insurance is tied along with it.

How much to take

You should first look to cover all the loan liabilities such as home loan, car loan etc. Then the household expenses need to be calculated (taking into account the inflation). Ideally, a sum assured that once invested should generate 65 per cent of these expenses should be catered for. While taking the cover one should deduct existing assets such as investments in stocks, mutual funds or provident funds. Health insurance for surviving members should continue.