Life insurance – How much premium you should pay?

Many of us think that every human being on this planet should cover his/ her life by insurance. I personally don’t think so. The reason is that if you think your life insurance won’t be fruitful for you then why should you waste your money on investing such a thing.

The amount of insurance paid for covering ones life depends upon a number of factors. This article deals with the factors which should be thoroughly considered before purchasing a life cover.

First of all, a person should get to know does he/ she really needs a life cover? If answer is yes, then depending upon the below given factors, he/she should make a decision about the amount of premiums.

So answer of the question ‘how much should you pay for your life insurance’ can be given based upon below described factors.

Age:

Age is the most important determining factor in deciding the amount of money one should invest in purchasing a life covering policy.

Health:

A healthy person should not purchase a life insurance having heavy premiums every month or year. It simply indicates that if you are fit enough to live a long natural life then why should you take additional headache of paying the premiums. For those who often feel unhealthy or suffer from serious illness should invest in purchasing life insurance. These kind of people need to purchase a life insurance for covering their future expenses.

Gender:

It is said that women live a longer life than men. So in case of men, they should buy a heavier amount of life insurance than a woman. So that in case of death of a man in the family, the family members can receives a return to bear their daily expenses.

In men dominant countries like Asian countries, if a man dies then family has to bear huge financial difficulties. It is because men are the main earner in these countries. On the other hand if a woman dies in a family, financially it does not affect rest of the family members.

So, in such countries, more investment on life insurance should be made by men rather than women. Women can be covered with a lesser amount of life insurance policy.

Occupation:

Occupation affects the need of life insurance as much as age. For people who are businessmen, professionals or designated on some higher post in a company, it is easy to afford a life covering policy with heavy premiums. These kinds of people make investment in life insurance for some other purposes also. These purposes may include tax saving, covering huge financial debts arising out of business activities etc. On the other hand people who don’t have a large source of income should avoid buying life insurance with heavier amount of premiums. It is because it would increase the chances of financial distress in family.

Amount of debt:

This is the factor which one should consider thoroughly before purchasing a life insurance.

No. of dependants:

This point is important because of the fact that no. of dependants decides future expenses for an individual. An individual who lives alone or don’t have any dependants after him, needs not to worry about increasing future expenses. This point is concerned for people who have dependants after them.

Contingent liabilities:

These are the future liabilities which may or may not incurred in future. These liabilities prove a deciding factor for a person who is thinking to purchase a life insurance.

Existing wealth:

The amount of existing wealth decides the amount of life insurance premium for an individual. Families who have enough capital to bear these future expenses need not to invest in such a thing like life insurance.

Do you really need a life insurance policy?

Once I heard a sales person saying that – “Everyone should have at least two or three life insurance policy purchased on his name”. Then a question came into my mind that should we really buy a life insurance to cover our life or it was just a trick that salesman was using to sell his insurance products? Like me, many of us get confused when someone tells us that we should invest some amount of our saving in purchasing life insurance.

This article is the result of that movement when I got confused by the tricks of that salesman.

Buying life insurance policy for everyone, sometimes result in blockage of money. Why am I saying that? It’s because if we don’t have a need for life insurance then why should we invest in such a thing.

Now a question arise that what are the factors that determine whether we need to buy such a policy or not?

In response to this question I would say that a person should buy life insurance policy, only when he has:

  • Dependants after him,
  • To pay some kind of debt,
  • To incur huge expense on the education of his children,
  • To get his children married and so on.

Now on the other hand buying a life insurance does not make sense for a person who has not a family, who has not a single dependant after him, who has enough money to pay his debt.

Many of us argue that although they don’t have any need to purchase a life insurance but it is not a blockage of money. They consider life insurance as a good investment option.

I would like to tell that there are many alternatives of a life insurance in terms of investment option. Anyone who does not have any need for a life insurance; should not go for it only because it is a good investment option.

Investing in life insurance product is not wise because the amount of return, a person can earn from it, is equal to nothing as compared to other investment vehicles. The main thing is that insurance companies also invest the amount received from insured people and pay only a part of it as a return to these policy holders. So put it simply an insured person gets only a part of return earned by insurance companies from his capital.

Now, what should we do with this amount? Based upon the risk appetite of an investor, this amount can be invested in companies as owner’s fund or borrower’s fund. It simply means that if you have the capability to bear higher risk and want to earn maximum return from your investment then investment in equity fund is a good option. If you don’t want to take much risk with your investment then you can opt for safe investment vehicles such as debt instrument, mutual fund and so on.

Which type of life insurance policy should you opt for?

Types of life insurance policyOnce a friend of mine asked me that which type of life insurance policy should he choose, for covering his life? I told him that there are various types of life insurance policies in the market and he should opt for a suitable policy which provides maximum benefit to him.

I started telling him that he should opt for a policy that caters all his requirements. Then I explained him the following types of life insurance policy:

Term insurance policy: A term policy is one in which an insured person has to pay a lower amount of premiums in comparison to other life insurance policies. These policies are usually taken for the period of 5, 10, 15, 20 or 30 years. If during that period, policy holder dies only then the beneficiary of the policy holder is given a specified sum mentioned in the contract. On the other hand if policy holder survives the policy period then nothing is returned to insured or his/ her beneficiary.

The amount of premiums are less for the younger ones and more for the older people as the chances of their death are more than the younger ones. For individuals who have crossed their 60s, it is almost unaffordable to pay the premiums of such a policy.

Endowment policy: Endowment policies are more popular policies in every corner of the world. It is because these policies provide the benefit of periodic premiums and a specified lump sum paid to the insured person even in case of the survival of the policy holder.

Insurance companies are mixing up these policies with other insurance policies to attract more customers. In many schemes, customers are provided with the option of investing their money into the various fund options provided by the insurer. These life insurance policies help the customer profit from rising markets.

Unit linked insurance plans (ULIPs): ULIPs are market linked life insurance policies that provide the policy holders double advantage of life cover and wealth maximization. These policies provide holders, the benefits of investing a part of their amount in the market products. Based upon the risk appetite of policy holder, these insurance policies provide a variety of fund options such as equity and debt instruments. The remaining part of the money paid by the insured is used to cover their life.

Money back policy: Preferred by many people, money back insurance policy provides the benefit of partial survival. It means that policy holders are provided periodic premiums of the sum assured. If during the tenure of the policy, the policy holder dies then the full amount is returned to the beneficiary without the deduction of money paid by the insurer at intervals. On the other hand if policy holders survive the tenure of this policy then they are paid the remaining amount of money, assured in the contract.

Annuity/ pension policy: This type of policy does not provide life insurance cover to the policy holders’ but merely provides a guaranteed income either for whole life of insured or for a specific time mentioned in the contract.

Policy holders have to pay a specific amount of money as premiums for a specific time period and after the end of such period, they are returned a specific amount of money periodically. In case of the death of policy holder or after the fixed annuity period expires for annuity payments, the policy holder are returned a sum assured in the contract.

Whole life policy: Validity of this insurance policy is not defined and thus whole life insurance policy covers policy holders until their death. It means that policy holders are covered throughout their life by such a policy.