WHY LIFE INSURANCE?
By Hermith Ramesh Mana,
Deputy Manager, Marketing,
NJI Life Insurance Company Ltd
Apr 04 - 10, 2005
The term "Life Insurance" is usually considered as insuring one's life to live forever. Unfortunately, the concept of life insurance is always misunderstood. In the real sense, life insurance provides financial protection in case of an untimely death, disease or disability, and even if one lives a long life.
It is the only system in the world that replaces the finances of the breadwinner in case of an early death, disease or disability and also provides a flow of regular income at old age. Man always plans for the future, but, while planning ahead he never thinks that life is uncertain. One may live too long or may have a very short life. No one likes to think that if he was not there yesterday what would have happened to his family today. Only the successful people anticipate the future needs.
Unfortunately, people consider life insurance as the last thing on their priority list. There is generally a perception that it is not needed at present. People tend to wait for a genuine need to arise before buying a life insurance policy. To be realistic, when the genuine need arises, it is unavailable. The beauty of life insurance is to buy when it is not needed. In fact, it should always be purchased when it is not needed the most. The "Titanic" was supposed to be unsinkable but yet it carried lifeboats.
One knows that his family counts on him every day for financial support: food, shelter, transportation, education, and much more. But he never tends to think as to how would his family survive in case he is no longer there? In instances one may live long enough but may suffer a critical illness or disability and instead of supporting his family he is a burden on them. You and your spouse have plans for your future and dreams for your family: another child, a bigger home, a new business, college education, travel, retirement...; life insurance simply ensures your dreams and turn into reality, even if you were not there. It is all about making sure your family has adequate financial resources to enable them not to depend on charity.
Another common use of life insurance cover is to help your family pay off any debts you leave behind. For example, mortgages, car loans, medical bills, and credit card debts are often left unpaid when someone dies. These obligations must be paid from the assets left behind but can deplete the resources that your family needs. Life insurance can be used to pay off these debts, leaving your other assets intact for your family to use.
Life insurance provides liquidity to your estate. When you die, you may leave some liquid assets (such as cash, saving certificates and bonds), and some illiquid assets (such as real estate, an automobile, and stocks). Your liquid assets may not be enough to pay all the debts that you leave behind. Your illiquid assets may have to be sold in order to meet these obligations when they come due. This may cause a financial loss if the assets must be sold cheaply in order to get the money on time. Life insurance can avert this situation, because the proceeds are available almost immediately upon your death.
It is only life insurance that creates a possibility for getting an estate for your heirs. After your debts and expenses are paid, there may not be much left over for your family but life insurance can automatically provide assets for them after your death.
Just as your spouse and children (as beneficiaries) count on you, you count on your spouse in case you depend on her income. That's why coverage for your spouse is also important. If he or she were to die unexpectedly, you would feel similar financial strains. This is especially true today, with so many "double income" families.
How Much Life Insurance Is Enough? As a rule of thumb, many financial planners recommend life insurance coverage equal to five to nine times your gross annual salary. (Use one of the higher multiples if you have younger children.) The same applies to your spouse.
Life insurance is not something you buy once and forget about. As your responsibilities grow — bigger family, higher income, and greater debt — you need to periodically evaluate and, if necessary, upgrade your coverage. If you're under-insured — or if you haven't begun to build a base of life insurance — term insurance plan is an affordable way to apply for life insurance you can count on.
While providing financial protection, life insurance also provides a platform for regular savings. It develops a habit to save on a long-term basis. It is the only investment tool that guarantees saving on your behalf incase you are not there anymore. It promises a lump sum payment against a mere investment.
In case you are single and do not have a family to support financially after you die, you may utilize this as a tool to give charity to the deserving people when you die. Life insurance can do that for you.
A life insurance company is the only financial institution that guarantees to pay a lump sum against a small amount, whereas, all other financial institutions provide a small return against a substantial capital. It is the life insurer who provides you the opportunity to make a substantial capital to reap better returns.
There are a lot of misconceptions about life insurance and the need for it, but it is certain that life insurance is the only financial vehicle that provides a complete peace of mind. It frees the human mind of the anxiety caused by thinking as to what kind of financial complexities would his/her dear ones face if he/she was not there any more and also relives the worry of being financially dependent in old age. It is very disturbing for a man to be financially dependent and reach poverty line in the old age after spending the entire life by supporting his/her dear ones. Insured people are likely to live longer, as the insurer is also praying for their longer life.