Have you got the right Insurance?

How many policies do you think you would require ensuring that you are adequately insured? Like investments should you spread them across different types of policies? What should be the amount to be put in different types of policies? Now what I am talking about is Life policies alone. You don’t know? You are not alone; there are many more persons like you.

Some persons treat life insurance like an investment for return, hence they go for the different types of policies. You should note that insurance is not an investment for return. You get a return only on the happening or non-happening of an event. Confused?

Many of us buy insurance as investment for return, but should actually buy it only as a cover for early death, so that our loved one’s do not suffer because of loss of income on account of our death. Funny, we call it life insurance, while it actually works as death insurance. Some buy insurance just because they tax benefits; this is the reason for having so many policies.

Before you buy an insurance policy, ask yourself if you really need one. In certain circumstances, you may not even need an insurance policy. If you do not have dependants, who are you buying it for? Also, if your spouse earns well, he or she may not require any financial support when you are gone. In such cases why should you spend money on premiums? It’s important to build assets and as your assets increase the need for insurance will decline.

Insurance became important, since as we kept growing we started creating assets, but creating assets is not easy. So to create an asset we take on liabilities. As our liabilities increase the need for insurance increases. So as our liabilities increase, we should start increasing our insurance, but as the assets increase and liabilities go down, you can stop taking more insurance.

The life insurance need of a person depends on several factors. There are also different ways to calculate this need. One of the simplest methods is to calculate the insurance requirement based on one’s future earning potential. The reason is if something happens to you, your dependents won’t have to worry about income. This is another reason, why insurance is usually brought on the life of a person who is earning.  

There is another way of calculating your insurance need; this takes into account the amount of money the family would require to maintain their current life style, in case something happens to the bread earner of the family.

One should carefully assess one's need for insurance and the features of a policy before signing on the dotted line. But what should you do if you have already bought an insurance policy that you now realize is wrong for you? What if you find yourself saddled with policies that offer you neither high protection, nor high returns?

Usually you should continue with such policies till the end. The Direct Taxes Code, which is likely to come into effect from April this year, states that an insurance policy should provide a cover of at least 20 times the annual premium for it to be eligible for tax deduction and other tax benefits. So if it provides less than 20 times and you had purchased it for the purpose of tax saving, then it would be best to surrender it. But if the time left is not much continue till the end.

You should be careful about ULIP’s, since the high charges are usually charged in the initial years. So if you have completed the initial years, continue paying premium till maturity, the returns would be better. If it is a single premium policy, no harm continuing it since you have already invested the amount.