Sunday 10 November 2013

Importance of Insurance - Part 2

Be safe or You'll be sorry! Part 2


You would have read my earlier post on


In this post, I propose to talk about insuring the most important risk that any human being faces - His / her life. Life insurance happens to be the most popular but gravely misunderstood insurance product.

A Life insurance policy essentially promises to cover the risk of life and during the tenure of the policy, if the policyholder were to die, the nominee / beneficiary who has been named in the policy would be paid the sum assured. (I'm consciously using the word "die" instead of using the usual euphemism which says "if anything untoward were to happen to the policyholder" - After all, I believe in calling a spade a spade!)

In its simplest form, let's assume the following:

  • Ms. X has insured her life for a sum of Rs. 25,00,000/=.
  • She's nominated her son Mr. Y as the nominee and beneficiary as per the terms of the policy
  • (Unfortunately like all of us including you and me, she also has to die some time or the other). Ms. X dies a couple of years after taking the policy while the policy is very much continuing to remain valid.

In the above example, after the death of Ms. X, Mr. Y will get a sum of Rs. 25,00,000/= from the insurance company, subject to the usual terms and conditions of the insurance policy being complied with to the satisfaction of the insurance company in terms of proper documentation of:

  • The validity of the insurance policy
  • The death of Ms. X
  • Identification of Mr. Y as the nominee & beneficiary as per the policy.

There are, as I've mentioned in my earlier post, a whole range of life insurance products that are available. A vast majority of those products would be completely unsuitable to you. Hence, you must learn to identify the basis on which you will choose a life insurance product that's relevant for you.

Here are some cues for the process:

First, do you need a Life Insurance policy? Well, most of the readers of this blog will require a life insurance policy. Some exceptions:

  • If you have no financial dependents, who is going to get the amount of sum assured after you die? Obviously, it doesn't make sense to have any life insurance policy.
  • If you're stinking rich like a Bill Gates or Warren Buffett or Azim Premji or Mukesh Ambani, you need to seriously evaluate if your dependents or near and dear ones are likely to be financially at a disadvantage due to your death. An additional million or two dollars may not make any difference to the wealthy heir of such a rich person. If you are truly wealthy, in my opinion, you (and your dependents) do not need a life insurance policy unless there are very strong reasons for the same.
  • If you're NOT earning any income or are earning a negligible income, your legal heirs are unlikely to be at any significant financial disadvantage due to your death. Again, a life insurance policy is of no use for you.
  • If your legal heirs are  "well-settled" and are financially completely independent, they won't be impacted adversely due to your death - at least financially. Again, in such an instance, you don't need any life insurance coverage.

I'm sure that based on the above, you'll have a better idea as to whether you require Life Insurance cover.

In my next post, I hope to talk about how to identify the quantum of amount for which an individual should obtain a life cover.

Watch this space!


Regards,

N


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