Insurance?—?Why and How?

During our childhood especially the 90s born?, most of us would have had a vivid memory of at least one relative (or) family friend of us who was an LIC agent and how well would they would pursue our parents to opt for a life insurance policy. And few of the parents even recommend their kin and kith to opt for a policy.And we had no scarce of LIC agents during that time. So what has changed now? Before we get into that, lets get to know what exactly is insurance.

Insurance:

Insurance is a contract (policy) in which an insurer indemnifies another against losses from specific contingencies or perils.

It’s basically our personal backup if all hell goes loose.

Scenario:

Lets take an example with Vicky?. Vicky was an average middle class man from South India who earns in north of 5 digits. He is married and has a 3 year old kid. He is the only breadwinner in the family. A few years have passed and the kid has now entered her higher education and her lovely parents have decided to buy a home. Cashing in all their savings and along with a loan of INR 70Lakhs, they bought their dream home. They moved in and led a happy life for a few days and then that devastating day happened, Vicky passed away suddenly due to a heart attack.

Vicky’s wife was mentally stranded already with her partner’s demise?, she couldn’t think straight?, with all along to it?she had her kids education mid way and piled up EMIs of their home.

Vicky’s father has asked Vicky to opt for a LIC policy when he found his first job and he has been paying a small premium of 300 every month. And his wife now received a settlement of INR 5lakhs. That’s better, but it doesn’t solve their problem. Of course, we all know the loss of life cannot be compensated but the arrangements for the family to thrive is a no brainer, right?

So what can be done right here? How can someone plan this right?

The planning:

Insurance is not something that you pay for the sake of paying it for a bare minimum premium and expect to cover for you post your demise. If that’s the way we have been observing insurance?, then we have been utilized by the insurance firms so far. So if you want to rethink it now?, and stir things up a bit for a better outcome. It’s time we leverage the insurance firms for what it’s meant to be.

First things first. Your presence cannot be replaced, especially for your family and dependents. However your financial presence can be replaced. Let’s see in detail how we plan it?:

Tenure:

What’s the ideal tenure for a plan? Tenure here is nothing but the duration of how many years (from which age to which age) you want to be covered under insurance.

No, the answer is of course not until your death.

Before you begin, think why you are opting for?insurance, it is to financially replace you in your absence. To whom do you provide that financial aid, your dependents.

Your dependents can be your wife, parents, children etc.

What if you are at your 18th age and do you think you need to opt for insurance, that would be your own choice. You at 18 most likely won’t have dependents rather you can be a dependent for your parents, so most probably you would be covered under your parents insurance ( if opted for).

Now at 21, you have to start to earn, let’s assume you are a first graduate and you think it’s time to take up the family baton and own things?, take up loan from your parents?, plan to retire your parents?, if that’s the case, then yes it’s better to have a life insurance plan at that age.

Now at 27–35, you are married and have children, your parents are at near 60, you have your children’s education, this would be the age where you might have multiple dependents on you, so it’s most likely wiser if you have a good Insurance plan at least by this age.

The more dependents you have to cover, the better it is to be equipped with a good Insurance plan.

Needs and situations:

Let’s say your father has amassed a wealth of 1000 crores and you are chilling in a luxury boat on weekends?, now in this case it doesn’t matter if you have insurance or not even when you have dependents.

But at the same time, you are a single working person in your family and you have multiple financial obligations, it is quite obvious to have insurance in this condition.

Cover Amount:

A 21 year old planning to take a cover amount of INR 10CR would be bad, given not only he has few dependents but he would also have to pay a premium too high every month for that cover amount?.

So depending upon your future planning and wants?arrive at an ideal cover amount. There are few calculations available online to help you arrive at the ideal cover amount.

If you still think you need more clarity on the cover amount part.

Think of this cover amount as your actual financial replacement.

Your dependents post receiving this amount should be able to invest this corpus amount in a safe instrument and should be able to get monthly returns from it to fulfill their basic needs (or) settle any major loans and seek alternate employment to meet their daily needs.

For example, you are an individual who earns 30K per month and you have opted for a cover of INR 60L. This 60L being invested in a Fixed deposit by your dependents will give them a return of INR ~35 per month (7% of 60 Lakhs = 4.2lakhs annually).

At the same time you should be able to pay the premium for this cover amount. A balance on your cover amount and premium you pay should be ideal.

Well that pretty much is enough for now, Not going to boil the entire insurance ocean in this single article.

Quick recap and main terms to consider before opting in

• Assess your needs and dependents
• Tenure/ Age range
• Cover amount
• Premium you can pay consistently.

Well, if this gives you a basic sense and idea of why insurance needs tobve opted, that’s one job done well.