Life insurance is meant to help your family members who are dependent on you for their financial needs. The policy ensures that they do not face financial hardship in your absence. The loss of life of an earning family member is devastating enough.
Life insurance provides insurance cover for many years. The question is, should the requirement of insurance change as times go by? Remember, as times change, your capacity to earn changes, family’s structure changes, the requirements change. Then, how your existing life insurance may fulfil your need when the situation changes in future? Let’s find out how to manage your insurance need with the change in the situation.
How much cover you may need?
While there is widespread awareness about the importance of life insurance, the required amount of coverage is often neglected. The size of life cover should take into account factors like income, the number of dependent family members, family’s financial need, current, and future expenses, loan repayment obligations, financial planning, etc. The thumb rule to select a life policy suggests around 10 to 15 times your annual income.
Should you get multiple life insurance policies?
If your financial responsibility increases in the future, then you can simultaneously increase the insurance cover by buying another life insurance policy. This will increase the sum assured. Buying multiple insurance policies is a good idea. Let’s take an example. Suppose you are a bachelor who just joined a company. Newly-employed youths hardly care for life insurance, but this is the right time to take it as the premium is very low at a younger age. Buying insurance when you are older may cost many times more.
After a few years, the young person marries and has a family. The sum assured under the existing insurance policy may not be sufficient to protect the family’s financial need adequately. In this situation, there are two options. Either close the old one and buy a new one with a bigger sum assured or buy another insurance with a smaller sum assured and keep the existing one running. The problem with the first option is that the new insurance will cost more as you are older than when you bought the first insurance. In the second case, buying other insurance will cost you a little more proportionately, but your existing policy will remain valid. Hence the combined cost for the same sum assured will be less in the second option.
Important point to keep in mind
When buying an insurance policy, ensure that you are neither under-insured nor over-insured because both the cases have demerits. Staying under-insured can expose your family to financial risk, whereas over-insurance may cost you an extra premium.
While selecting the life insurance policy, don’t forget to check the claim settlement ratio of the insurance provider. A company with a higher claim settlement ratio should be preferred.
Finally, while having multiple insurance policies is a good idea, do not overdo it. A part of your income must go to investment for wealth building. Insurance is protection against any future eventuality, but the investment is used to build wealth as per your financial goals. Few insurance policies combine insurance and investment. ULIP is one such product. While it is advisable not to mix insurance and investment, you can check with individual ULIPs and study their performances over time if you want to invest in it.
(By Niraj Jain, CEO, JRK Insurance Broking Pvt Ltd)