Do you really need life insurance?

These days, with greater awareness due to more advertising, more and more people are wondering whether they are adequately insured or not. But the first question they should be asking themselves is ‘Do I need life insurance in the first place?’ Contrary to popular belief, while most people do need life insurance, this need doesn’t apply to everyone. Let’s see why.

What does life insurance do?

Life insurance, and by this we mean pure term insurance, makes a one-time lump sum payout on the death of the policy holder, to the beneficiary registered with the insurance company.

What purpose does this serve?

The Sum Assured is meant to replace the income of the life insured, so that in this person’s absence, the dependents don’t suffer financially, and don’t have to compromise on their standard of living.

Alternatively, your death should not financially hurt your loved ones.

This implies 2 things:

If you want to insure your life, you are doing it for the benefit of your financial dependents

If you have a liability of any kind, you should insure yourself at least to the extent of the liability, so that in case of your death, it does not devolve on to your loved ones.

So, if you have no financial dependents (to know this for sure, check where your salary or business income goes) and you have no loans, you don’t actually need life insurance.

Keep in mind that situations change constantly. While you may have no dependents and no liabilities today, tomorrow you may be the sole breadwinner, with kids and a home loan. In this situation, life insurance is not just required, but it is vital.

In case you do need life insurance, the first step is to check how much life insurance you need.

Once you know what the figure is, and it might be larger than you anticipate, you should opt for a straightforward term plan. Try and stay away from other kinds of life insurance, such as endowment policies, money back policies, return of premium policies, and ULIPs. These policies merge insurance with investments, and it is always advisable to keep insurance and investments separate.

Also note, if you have life insurance, be sure to update the insurance company with the name of your beneficiary if it changes. For example, while you were working, you may have taken a policy in the name of your parents, even though they are not financially dependent on you. Now you may be married and have kids, so the beneficiaries should be your spouse and through your spouse, your children.

Additionally, you may have taken life insurance of say Rs. 30 lakhs, but your need now could likely be much greater. You can top up your life insurance policy, or simply take a new policy, from another company if you so wish.

Remember, insurance planning is an important part of your overall financial planning exercise, and should be handled with as much care as planning for your life goals.

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