Using A Life Insurance Calculator When Choosing An Ideal Life Insurance Plan

One part of your financial portfolio that is extremely important is life insurance. If you purchase this type of insurance today, your loved ones will have nothing to worry about when you die. Owning insurance determines your disposition towards your finances. The first thing that you have to consider prior to your purchase is the amount of insurance you need. The best tool to use in calculating the exact amount of insurance coverage is the life insurance calculator.

The function of a life insurance calculator

The life insurance calculator eliminates the stress that you will experience in finding out the best insurance policy for you. It will also help you decide how much insurance you need. The calculator needs some basic information such as your family’s resources, expenses and debt, current insurance coverage and future income. Based on information that you provided, the calculator will be able to give you the estimated amount needed for your coverage. Compare the policy price among the leading life insurance companies to make sure that the policy you will purchase will help you save money.

Factors to be considered when using an insurance calculator

The basic purpose of this calculator is to make an approximation on the amount of coverage which is enough to provide a comfortable living for the policy holder and the beneficiaries after his or her death. The first thing to consider in the calculation is the amount of income and expenditures. The income refers to the salary of the policy holder, spouse income or pension. The expenditure includes funeral cost, educational expenses, livelihood costs, property management operating cost and monthly mortgages. The age of the spouse and the number of years required for the youngest child to reach the age of 18 must also be considered.

When the calculation is done, a suitable estimated amount of insurance will be presented by the calculator. If it shows a negative result, this means that it is not necessary for you to purchase a new insurance policy. On the other hand, if the result shows a positive figure, this means that you will have to buy an insurance policy that is equivalent to the amount represented by the insurance calculator.

All information you gathered will serve as a guide in choosing the best life insurance that will provide security to your family. This life insurance tool gives you an idea on how to give your loved ones a comfortable life when you are no longer around.

Reasons Why Every Elderly Person Ought to Be Part of a Life Insurance Plan

As you shop for insurance, you will discover many service providers available in the market. Therefore, it is important to find the right company to get value for your money. When you purchase insurance from any leading company, you stand to benefit a great deal. If you are of reasonably good health or your illness is properly controlled by medication, there is a high chance that you are eligible to obtain better coverage and better premiums. If you are of age, the reasons for purchasing life insurance for seniors include:

· To support dependents

If your family is dependent on your income, you should consider the option of finding the right insurance coverage. People are working after retirement and have dependents (such as a spouse, children and/or grandchildren) that need to be supported. Many of the times, the wife is dependent on the husband’s pension, which stops after his death. Therefore, the right policy is recommended highly. Over time, the life expectancy has improved, with most of the women living 4 to 5 years longer than their husbands do. If husbands want to ensure their wives are self-sufficient after their death, it is advisable to purchase insurance to create for them a large corpus. The right policy helps a great deal in cutting financial losses.

· To repay loans

Many of the banks often approve applicants who will be in a position to repay their loans by the time they are the age of 60. Furthermore, many people owe money to friends or relatives. In such cases, it is important to apply for the right life plan. If something unexpected happens such as the loss of income or death, the proceeds derived from the insurance policy can be used to repay back the loan.

· Bequeath an inheritance

With the prevailing economic condition, just a few senior citizens have enough wealth to pass on to their heirs. However, for those who are looking for an affordable and effective way of leaving an inheritance to their loved ones, they can consider purchasing insurance and naming their children or grandchildren as the beneficiaries. The benefits from an insurance policy are tax-free, which makes them an attractive option.

· Cover burial expenses

Funeral expenses can account for tens of thousands of dollars. This is often beyond the capacity of most households to afford, particularly households that have recently lost the sole breadwinner. Some families end up borrowing money to cater for a dignified burial of their loved ones. Therefore, you can consider taking responsibility of the expenses attributable to your funeral and burial by purchasing the right insurance.

Avoid These Six Common Life Insurance Mistakes

Life insurance is one of the most important components of any individual’s financial plan. However there is lot of misunderstanding about life insurance, mainly due to the way life insurance products have been sold over the years in India. We have discussed some common mistakes insurance buyers should avoid when buying insurance policies.

1. Underestimating insurance requirement: Many life insurance buyers choose their insurance covers or sum assured, based on the plans their agents want to sell and how much premium they can afford. This a wrong approach. Your insurance requirement is a function of your financial situation, and has nothing do with what products are available. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisers say that a cover of 10 times your annual income is adequate because it gives your family 10 years worth of income, when you are gone. But this is not always correct. Suppose, you have 20 year mortgage or home loan. How will your family pay the EMIs after 10 years, when most of the loan is still outstanding? Suppose you have very young children. Your family will run out of income, when your children need it the most, e.g. for their higher education. Insurance buyers need to consider several factors in deciding how much insurance cover is adequate for them.

· Repayment of the entire outstanding debt (e.g. home loan, car loan etc.) of the policy holder

· After debt repayment, the cover or sum assured should have surplus funds to generate enough monthly income to cover all the living expenses of the dependents of the policy holder, factoring in inflation

· After debt repayment and generating monthly income, the sum assured should also be adequate to meet future obligations of the policy holder, like children’s education, marriage etc.

2. Choosing the cheapest policy: Many insurance buyers like to buy policies that are cheaper. This is another serious mistake. A cheap policy is no good, if the insurance company for some reason or another cannot fulfil the claim in the event of an untimely death. Even if the insurer fulfils the claim, if it takes a very long time to fulfil the claim it is certainly not a desirable situation for family of the insured to be in. You should look at metrics like Claims Settlement Ratio and Duration wise settlement of death claims of different life insurance companies, to select an insurer, that will honour its obligation in fulfilling your claim in a timely manner, should such an unfortunate situation arise. Data on these metrics for all the insurance companies in India is available in the IRDA annual report (on the IRDA website). You should also check claim settlement reviews online and only then choose a company that has a good track record of settling claims.

3. Treating life insurance as an investment and buying the wrong plan: The common misconception about life insurance is that, it is also as a good investment or retirement planning solution. This misconception is largely due to some insurance agents who like to sell expensive policies to earn high commissions. If you compare returns from life insurance to other investment options, it simply does not make sense as an investment. If you are a young investor with a long time horizon, equity is the best wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP will result in a corpus that is at least three or four times the maturity amount of life insurance plan with a 20 year term, with the same investment. Life insurance should always been seen as protection for your family, in the event of an untimely death. Investment should be a completely separate consideration. Even though insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own evaluation you should separate the insurance component and investment component and pay careful attention to what portion of your premium actually gets allocated to investments. In the early years of a ULIP policy, only a small amount goes to buying units.

A good financial planner will always advise you to buy term insurance plan. A term plan is the purest form of insurance and is a straightforward protection policy. The premium of term insurance plans is much less than other types of insurance plans, and it leaves the policy holders with a much larger investible surplus that they can invest in investment products like mutual funds that give much higher returns in the long term, compared to endowment or money back plans. If you are a term insurance policy holder, under some specific situations, you may opt for other types of insurance (e.g. ULIP, endowment or money back plans), in addition to your term policy, for your specific financial needs.

4. Buying insurance for the purpose of tax planning: For many years agents have inveigled their clients into buying insurance plans to save tax under Section 80C of the Income Tax Act. Investors should realize that insurance is probably the worst tax saving investment. Return from insurance plans is in the range of 5 – 6%, whereas Public Provident Fund, another 80C investment, gives close to 9% risk free and tax free returns. Equity Linked Saving Schemes, another 80C investment, gives much higher tax free returns over the long term. Further, returns from insurance plans may not be entirely tax free. If the premiums exceed 20% of sum assured, then to that extent the maturity proceeds are taxable. As discussed earlier, the most important thing to note about life insurance is that objective is to provide life cover, not to generate the best investment return.

5. Surrendering life insurance policy or withdrawing from it before maturity: This is a serious mistake and compromises the financial security of your family in the event of an unfortunate incident. Life Insurance should not be touched until the unfortunate death of the insured occurs. Some policy holders surrender their policy to meet an urgent financial need, with the hope of buying a new policy when their financial situation improves. Such policy holders need to remember two things. First, mortality is not in anyone’s control. That is why we buy life insurance in the first place. Second, life insurance gets very expensive as the insurance buyer gets older. Your financial plan should provide for contingency funds to meet any unexpected urgent expense or provide liquidity for a period of time in the event of a financial distress.

6. Insurance is a one-time exercise: I am reminded of an old motorcycle advertisement on television, which had the punch line, “Fill it, shut it, forget it”. Some insurance buyers have the same philosophy towards life insurance. Once they buy adequate cover in a good life insurance plan from a reputed company, they assume that their life insurance needs are taken care of forever. This is a mistake. Financial situation of insurance buyers change with time. Compare your current income with your income ten years back. Hasn’t your income grown several times? Your lifestyle would also have improved significantly. If you bought a life insurance plan ten years ago based on your income back then, the sum assured will not be enough to meet your family’s current lifestyle and needs, in the unfortunate event of your untimely death. Therefore you should buy an additional term plan to cover that risk. Life Insurance needs have to be re-evaluated at a regular frequency and any additional sum assured if required, should be bought.

Conclusion

Investors should avoid these common mistakes when buying insurance policies. Life insurance is one of the most important components of any individual’s financial plan. Therefore, thoughtful consideration must be devoted to life insurance. Insurance buyers should exercise prudence against questionable selling practised in the life insurance industry. It is always beneficial to engage a financial planner who looks at your entire portfolio of investments and insurance on a holistic basis, so that you can take the best decision with regards to both life insurance and investments.