Buying Life Insurance – A Balancing Act
July 25, 2016 Leave a comment
The conventional financial wisdom is that people best serve themselves by purchasing an online term insurance plan and investing the rest of the premium in diversified equity mutual funds. I have a slightly different take on the matter. Let me explain. Many readers have remarked on the difference between my stand and that of other experts.
If you are young, just started working, have little savings, come from a family with little savings, are the sole or main bread-winner of the family and have many dependents, an inexpensive term insurance plan is your best bet. Even as you work towards building wealth, you don’t put your loved ones at the risk of destitution, should something happen to you.
Also if you are older but have to provide for home and children and perhaps have mortgage and car loans etc. outstanding, you’d do well to increase insurance cover via a term plan for the duration of these loans to ensure that in your absence unpaid loans don’t add to your family’s miseries.
To help you these days companies like Max Life Insurance offer term insurance plans,that pay out death benefits in various ways so you can pick one that suits your exact family and financial situation. E.g.:
1.Max Life Online Term Plan Basic Life Cover: This is the basic option where beneficiaries receive a lump sum as death benefit.
2.Max Life Online Term Plan Life Cover + Monthly Income: The option where beneficiaries receive a lump sum at first plus a monthly income for 10 years after the policy holder’s passing. The effective total death benefit with monthly payouts is 148% of Sum Assured
3.Max Life Online Term Plan Life Cover + Increasing Monthly Income: This plan looks to combat the rise in costs of living by providing beneficiaries with an increasing income. The income increases every year by 10%.
Long term readers know that I normally push for Whole of Life Insurance .Here’s my reasoning:
Most of us will probably outlive the current life expectancy due to improvements in medical science. Most of us will survive past middle-age, see our children grow and become independent and the number of our dependents reduce, even as we fund retirements and perhaps think of leaving behind a legacy. Whole of Life Insurance is an excellent tax advantaged vehicle to provide for retirements, leave behind a legacy and estate planning in addition to security. The necessity to pay premiums regularly acts as forced savings, making certain you don’t compromise on savings goals in the press of life.
However a number of us won’t be as lucky and should we have dependents, providing for them is a duty. As a way of balancing out the costs of dying young vs. needing to plan for a long and well-lived life, I choose Whole of Life Plans and supplement them with Term Plans to cover specific and shorter term risks.
As for the returns angle to insurance decisions that people invariably bring up. Here’s my take. I buy insurance to buy peace of mind and ensure that what I’ve worked long and hard to build is not destroyed easily. Also I make all investments, in part at least, to ensure peace of mind, to know that I will always have enough to manage well enough. So, capital safety and predictability of returns in all time frames is a big deal to me. So I always invest a substantial amount of my cash holdings,about 35% at least in debt instruments that I plan on holding to maturity. In the background of my entrepreneurial ventures, with no guarantee of profits, the lack of volatility in a part of my portfolio gives me peace of mind that I prize. The savings components of insurance plans form part of the non-volatile debt component of my portfolio. And I have little interest in chasing returns by diverting a part of insurance premiums to mutual funds where I have little control over investment decisions and in doing so increase my BP on daily basis. I can sacrifice a few percentage points of potential returns on a part of my portfolio to ensure a guaranteed return, even as I seek higher returns elsewhere.