The question that crosses most people’s minds at some point of time is “Do I really need life insurance?” Similar to taking other financial decisions, the answer to this lies in evaluating your financial needs. The need for insurance stems from your individual financial goals and family commitments in your present and future days to come. An honest assessment of your position would thus help you decide your need for insurance, the type and amount of cover you require.
Understanding the Main Objective of Life Insurance
We live in a world of uncertainties. Mishaps, natural disasters and illnesses may strike us without any warning. We may not be able to avoid or control their occurrence; however, we could prepare ourselves to handle the aftermath. Life Insurance policies work towards this objective by providing the much needed financial support to the insured’s family in the need of the hour.
Today, life insurance policies have evolved into a variety of forms. From pure term plans, to investment linked protection plans, the market is flooded with options. Rather than merely just buying a policy, it is equally important to choose a plan that suits individual needs.
Guidelines to Need Evaluation
As stressed on many an occasion, the decision to buy any financial product must be on the basis of one’s individual financial need. Here is a quick way to go about this evaluation.
- Analyzing needs and expenses:
Every individual has diverse needs. From buying a new home, to sending children abroad for higher education, the needs may sometimes seem endless. Start with analyzing your present as well as your future needs. What are the big expenses you may have to incur? What are your immediate expenses? Make a realistic assessment of it.
Your current resources play a significant role in determining your need for insurance. With your current resources would you and your family be able to fulfill the goals? Include your current assets, investments and liabilities in your calculation. Remember any loan, credit card dues etc...would fall on the shoulders of your partner if anything were to happen to you. Check to see if your investments would sustain long enough to provide for them.
- Concept of Human Life Value:
Human Life Value (HLV) is a term that expresses the value of your life in terms of money. The concept not only measures your current worth but also the future worth. Human Life Value thus helps you to arrive at how much insurance you may require. It takes into account your total expenses, earning capacity through your working years, your age, and the effect of inflation on your savings. The concept of HLV helps to make an estimate of insurance cover required as on date to protect the future of your family.
The Need For Insurance
Coming back to the question “Do you really need insurance”? After having done a through need analysis, it now becomes easier to answer the question. Sum up your financial goals. Check the present and future value of your goals. If your analysis reflects a shortfall in providing for your dependents, the answer is yes.
When can you do without insurance? The purpose of insurance is to replace your income for your dependent if anything were to happen to you. If you have grown up children and no other commitments, you most likely may not require an insurance policy. Also, if your savings and investments are more than enough for a comfortable life ahead, and you have no financial dependents, then you could do without a life insurance policy.
The author is CEO of MyInsuranceClub.com