Are You Over-Investing in Your Insurance?, There are some people who are looking for the cheapest life insurance policy to fulfil their protection needs. However, at the same time, there are people who like to invest the maximum fund in insurance schemes.
When posed with the question of why, they simply reply more investment means more returns. The question here is- is it prudent enough to invest out-of-the-limit in insurance schemes, even if these schemes belong to a unit-linked category? The simple answer is no.
Are You Over-Investing in Your Insurance?
Insurance is not an investment tool exactly
The core purpose of having any insurance is to have protection against contingencies. To offer financial protection, insurance companies are charging some amount out of the premium as a fee and the rest of the amount is utilized for creating a pool of funds to protect those in need. To do this, insurers have various kinds of propositions so that every person interested in insuring himself is able to find a plan that suits his financial state.
Initially, plans were largely traditional in nature that offered guaranteed minimum returns over a period. Many people did not find this idea of insurance lucrative enough and preferred other investment tools to earn comparatively higher profits. So the insurers came up with ULIPs that is unit-linked insurance plans, to be able to give better returns or market-linked returns to customers. The basic fundamental of providing protection remained the same.
Take inflation into consideration to understand whether it is right to over-spend
To better understand the concept, take inflation into consideration and calculate the financial returns you would get over the period. Would the returns received be considerable enough to fulfil at least some of your needs? No. You find that you would basically be using your own funds that get added to the small percentage of profit your investments are able to accumulate over a period of time. Saying that does not imply that insurance is of no use. It is just that the system of insurance works to provide you with much-needed, timely protection that you would not be able to avail yourself of. So, it always makes sense to have insurance, but one should not overspend on it to have huge returns.
How should you decide whether you are overspending?
There are many general rules that insurance dealers follow to make buyers understand the estimate of their needs. The basic question is- how much life insurance do you really need? To check whether what you are spending is enough or more than what you are required to spend, read and calculate the recommended sum insured.
- Insurance equals ten times your annual income. For instance, if you earn Rs. 10, 00,000 annually you should buy coverage of Rs. 100, 00,000.
- Insurance is equal to 5 times your annual income plus total liabilities. If total liabilities are Rs. 70, 00,000 and annual income is Rs. 10, 00, 000. The estimate comes to Rs. 1, 20, 00, 000, that is Rs. 50, 00,000 (510, 00,000) plus Rs. 70, 00,000.
- Insurance is equal to 300 times your monthly expenditure. Say you spend Rs. 50,000 per month, your coverage should be equal to Rs. 1, 50,00, 000 (50,000300).
- Insurance is equal to the amount your family needs. Family needs do not remain constant for a long time. The expenditure today can increase tomorrow if kids pursue higher studies. If your children are in their earning phase of life, expenditure may not increase, but rather decrease. For this, take an estimate of various needs on a yearly basis that are not in a scene in the present but need could crop up after some years. Add up the immediate liabilities surfacing at the event of demise and what your family will need for ongoing needs for the number of years you would like to protect them financially.
By using the above methods you get rough estimates about how much sum insured you should have. If one of these estimates matches with the collective sum insured of all your life insurance policies with a difference of even a few thousand rupees, you are on the right track. However, if the collective amount of the sum insured by your policies is much more than these estimates, you need to look into the matter.
Neither it pays to be underinsured nor does it pay to be overinsured. Assuming an insurance plan as an investment plan is fine to a certain extent as it offers tax benefits and keeps your financial goals in place but allocating maximum funds there is not a wise decision.
By investing more than what is required you are converting your investment into expenditure. To extract maximum value out of your money, invest in insurance only what is required and the difference can be used somewhere else to maximize the returns
Read More: Life Insurance Myths and Facts