015 Insurance Considerations

While purchasing life insurance, you may keep the following principles in mind:

1. Insurance is meant to help you fulfil your financial responsibilities even though you are no longer around. Insurance is not meant to be an investment product. Use term insurance to obtain the risk cover you need. Invest the rest of the premium into an actual investment product in line with your investment objectives.
2. The financial markets have a multitude of products for specific requirements: Stocks for wealth creation, Bonds for reducing volatility, Gold as an inflation hedge, International investments to reduce home country/ currency risk, insurance for transferring event risks etc. The flip side is that given these multitude of tools, you could potentially use the wrong tool that doesn’t suit your purpose. The usage of insurance products for investment purposes along with risk cover is one such example. On a yearly basis for these products, the premium you pay is split into a very small risk cover component and a bulk to go into sub-optimal investment products. Neither does this chimera offer enough financial protection in the event of death, nor does it offer investment returns. The only people who gain from this transaction are the agent who gets his commission from your premiums and the insurance company that gets its fees.
3. The policy is required only if there is an income that needs to be substituted. If you do not earn an income, you do not need term insurance. If there’s no financial impact, the premiums paid are pointless. If you are no longer earning, you no longer need to keep the insurance active and could let it lapse by not paying the premium.
4. The policy is required if there are beneficiaries who depend on you financially. If not, there is no point in paying thousands on a yearly basis that could better benefit you better in spending now or investing to spend at a later point in time.
5. There is no point being over-insured. The premium you pay depends on the death benefit, so purchasing excess cover you don’t require is a waste of money that you can better invest elsewhere to benefit your dependents.
6. All other factors being alike, the probability of a 25-year-old dying in a given year is smaller than that of a 60-year-old, which means that the premium required to cover you rises with age. The sooner you purchase the cover, the lower the premium will be. However, you also pay for more years, so it tends to even out over the long run. In an actuarial sense, the insurance company is neutral to your demise if you take the cover at 25 or 60 as the premiums are corresponding to their risk.

The term insurance product is wonderful to transfer the risk of your untimely demise and protect your dependents. How much of a cover is appropriate for you? We will cover that up next.