Do you need cover?

While insurance is an essential part of financial planning, under specific circumstances, you would do well not to buy a life cover.

Print Edition: July, 2010

With the right policy, life insurance is an excellent tool to ensure your family's financial security in case of your untimely demise. While there is a definite case for being insured (as our cover story emphasises), not everyone needs a cover. Hence, it's important that before buying a policy, you analyse why you need to be insured and who, if any, will be affected financially by your death. If a situation or a lifestage doesn't call for a cover, you should not be forced into buying one. Here are the specific circumstances that don't necessitate a life insurance policy:

If you have no dependants: A life insurance policy is essentially meant to replace the income of the policyholder when he is no more. This implies that if a person does not have financial dependants, he probably does not need a life cover.

  • As a young professional without dependants, you have no reason to spend on life insurance. At least, not immediately. However, while your family may not be dependent on your income, ensure that liabilities, such as a big-ticket home loan, do not affect them.
  • If you are retired or your children have left home and are financially independent, there is little need for an insurance policy.
  • If you do not have heirs and have assets that can be liquidated in old age, you don't require a cover. 

If you have saved for dependants: If you have salted away enough to support your dependants, say, a spouse, after your death, why pay the premium for a life insurance policy? This does not mean that you should discontinue an existing policy, just that you shouldn't be talked into buying a new one by an overzealous agent.

If you just want to save tax: While insurance policies offer tax benefits, it is not reason enough to subscribe to a scheme. People habitually buy life insurance as part of their income-tax planning, whereas there are more lucrative investment options for saving tax than an insurance policy that gives low returns.

If you want to cover spouse/kids: People tend to buy life insurance for their unemployed spouse or children just because such policies exist. Neither a homemaker nor a child has an income to protect and there is no benefit in buying such a policy for them.

Cost vs benefit evaluation: The cost of life insurance is based on actuaries, which is the calculation of risk based on age- and health-related parameters. The risk for an insurance company increases as a person ages. This is why the premium for a healthy 21-year-old nonsmoker is low, while a man who is in his 50s and smokes will pay a small fortune to buy the same coverage. So, if you are in the high-risk category, you should evaluate whether the high premium is worth it, depending, of course, on the value of your assets. The bottom line? Don't buy a life cover if you don't need it.

You don't need insurance if:

  • You are single and nobody depends on your income.
  • You don't have any liabilities, such as a home loan, that might affect your family's finances.
  • Your dependants (read, children) have moved out and your savings can sustain your spouse.
  • You have retired and don't have an income.
  • You don't have heirs and have assets that can be gradually liquidated.

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