It is important to keep in mind that Insurance is not an investment, but the cost which is incurred to mitigate financial risks. When buying endowment schemes which club insurance with investment, we are actually buying two products viz insurance & investment at the same time. So one should be able to analyze both the insurance requirement part, as well as the investment returns portion.
As far as measuring the insurance requirement is concerned- it is simply the financial shortfall/risk that the dependents would face in case of your untimely goodbye. Calculate the sum total of the liabilities, both one time and recurring; Factor your net worth, inheritance and the regular income in the form of pensions and existing insurance; the difference is the additional insurance requirements. This requirement is most in the initial years, and as the net worth grows and liabilities become less, it keeps reducing-eventually to zero. As this figure will keep changing every year, as also from a cost-effectiveness point of view- Term insurance is the best option. On the need of it- Well for most of us with standard liabilities like education and marriage of children, factoring the retirement benefits and pension, the present cover of 50 times monthly income might be adequate. The money being spent on surplus insurance can be better utilized to grow your net worth.
When taking an Endowment plan-which is insurance cum investment, one needs to analyze both the insurance and investment part. It would be interesting to note that such plans far short of the complete insurance requirement and the returns from investment are far less than simple PPF returns. One should not fall for the possible corpus at the end of the plan, but convert it into annualized returns for correct assessment. Another biggest disadvantage is that once in it, it is difficult to exit midway which is why the agents offer attractive gifts/cashback on the first installment. The monthly installments restrict your capability to invest in growth instruments. You are gen doomed if you exit, and doomed if you don't. Once trapped, one tries to find solace with whatever he is getting.
So- the recommendations are:-
1. Evaluate the exact financial risk and buy Term insurance which should be revised periodically.
2. Insure only the earning member and not the dependents, and only till such time as there are dependents and your net worth is inadequate.
3. Evaluate the cost of continuing/exiting any running endowment plan, and do not hesitate to exit midway for a more beneficial option.
4. Don't make your insurance cover so attractive that the dependents start praying for your Good Bye.
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