Disasters don’t usually announce their arrival. They strike unnoticed, often with dire consequences. The need for life insurance comes from the need to safeguard our dependents in the unfortunate event of our demise or loss of earning capacity due to serious illness or disability.
Life insurance is chiefly a risk management tool. Accidents, illnesses and disability are facts of life which can be extremely devastating—both emotionally and financially.
Imagine a situation when your financial dependents, your near and dear ones have to fend all for themselves if something catastrophic were to happen to you? It is a situation that you would not want them to be in ever. Life insurance, which pays out in the event of your death, would give them financial security.
Many people are simply not prepared for the financial consequences that can follow unexpected events. If, for instance, a working couple with two children were suddenly reduced to one income, they will have to make serious adjustments in lifestyle and financial goals.
What if this loss is for the long term? The impact can leave a deep financial hole, which can alter the course of the family’s financial health and in some cases abruptly end some goals in life.
Most people are so focused on earning their pay and building their wealth that they don’t take the next step of protecting it.
With insurance, one can ride out the bad times without having to worry too much about how they will manage their monthly cash flows. It is the most simple, yet most misunderstood, financial tool that people do not look into.
There are many instances of buying insurance for the wrong reasons. Though very tax efficient, these products should not be bought with tax-savings as the sole incentive. One must buy insurance for protection first and everything else later. And it is important to strike a balance between being under-insured and over-insured.
The old saying, that insurance is sold and not bought, is changing slowly, with many individuals realising the need to protect their dependents from financial shocks. Determining precisely how much life insurance you need is a complicated question. The amount of life cover you need is a function of your age, income, assets and financial liabilities.
At the same time, the assessment of life insurance needs shouldn’t be a one-time exercise, it should be dynamic and responsive as life itself is. Your life policies should ensure financial protection for your family in the event of a calamity and also serve as a wealth creation tool.
Though the amount of life insurance cover will vary depending on the individual, it is important to understand that needs change at different phases of life and one should increase or decrease cover proportionately.
Every person’s needs are different and it is important to have a good risk protection strategy in place. Remember, however, that the later you start, the more at risk you are that your health deteriorates, which may render you uninsurable or significantly increase the cost when you want to buy insurance.
Gaurang Shah, Managing Director, Kotak Mahindra, Old Mutual Life Insurance