Insurance
- Insurance is typically defined as an agreement where a company pledges compensation for certain losses or events upon payment of a premium. But this concept of protection is often misunderstood. In the case of life insurance, the protection isn’t for your life but for your wealth. The same goes for health insurance too, it’s not for one’s limbs or heart but to protect the wealth which would otherwise be used up towards incidental hospitalization expenses. This is the core of insurance, and anything that doesn't align with this isn't insurance, even if it's endorsed by an insurance company.
- Building wealth is a gradual process, often taking years and a threat to your health or life will impede its growth. An insurance acts as a safety net while you’re working on building wealth. Think of it as a backup plan when life throws you a curveball.
- When you see it this way, getting an insurance becomes important to fend off risks that could impede wealth creation. So, a life insurance isn’t an investment instead it’s essential purpose, is to protect against financial setbacks that can arise during your investment journey. While not directly adding to wealth, it serves as a safeguard that compensates for unforeseen risks – eventualities that may materialize when faced with uncertainty.
Life
- A life insurance is merely an arrangement where an insurance company offers compensation to your dependants if you pass away, in exchange for premium payments.
- As you set out to build wealth for the future, you contribute portions of your income for growth to secure against rising costs & potential income loss (old age or lack of opportunities). A pure life insurance will contribute to this corpus should anything happen to you that may impair your ability to earn an income. Simply put, the proceeds from insurance will kick in and make up for you if there is loss to your life. This pure life insurance is commonly referred as ‘term insurance.’ A “no-strings” attached life insurance policy that comes into effect only in the event of the insured’s death. If you survive the period of insurance, ‘you get back nothing’ yet bearing this expense could most certainly be deemed an investment against an uncertain life.
- Here're a few broad guidelines to help you go about choosing a pure term life policy (or Plan B to your wealth creation process)
- Buy a term life insurance policy early in life as it progressively gets expensive to buy one as your grow old.
- Few factors determine the coverage (sum assured) required in a term life insurance policy. These include the following;
- The calculation for life cover is often based on your income rather than expense. Though, in principle, this replaces future income earning capacity it’s important to calculate current expenses and extrapolate it to arrive at a sufficient sum as “coverage.”
- Number of financial dependents is to be considered before arriving at a reasonable “coverage.” If there’re no financial dependents, you do not need a term insurance.
- The “coverage” must take into consideration any outstanding debts/liabilities.
- Diversification of term life policies helps. Pick them based on your changing needs. For instance, policies taken exclusively to the tune of outstanding debts/liabilities can be discontinued once they’re closed.
- The period of insurance cover or term of the policy must be directly proportional to the time it’s likely to take you to build sufficient wealth to meet overall expenditures of non-income period (i.e., post-retirement).
- Insurance is a long-term contract. Choose from a company that is reliable, reputable and one that holds a solid long-term track record particularly when it comes to settlement of claims.
- Take disclosures seriously. Do not conceal any material information with respect to medical ailments including family medical history and hold transparency about your occupation.
- Customization of a term life policy is possible with riders. Riders are additional benefits that come into play on the occurrence of a specific event & provides “coverage” over and above the basic cover. A few common riders are – Accidental death benefit, Disability benefit & Critical illness amongst others. These are available through non-life insurance companies too and their costs vary with the features they provide. Evaluate them solely based on your needs.
- While cost is important do not opt for a term life policy merely based on low premiums.
- If you’re unsure regarding the right amount of life cover and an ideal term for an insurance, reach out to us to help you pick out a policy that’s most suited to you and in line with your wealth accumulation phase.