Complete Guide to Life Insurance- Let’s Make Informed Decisions!

What is a Life Insurance Calculator?

Life insurance is a financial safety net that provides monetary protection to your loved ones in case of your untimely death. It's essentially a contract between you and an insurance company where you pay regular premiums, and in return, the insurer promises to pay a specified amount (death benefit) to your beneficiaries upon your death. A life insurance calculator helps in estimating the coverage required.

Why to Use Our Life Insurance Calculator?

Life insurance policies are typically offered in standardized increments, such as ₹1 crore, ₹2 crores, and beyond. Most calculators rely on simplified heuristics, such as the multiple-of-income method, to estimate coverage. However, these broad assumptions often result in either underestimating or overestimating the actual coverage required in the event of an unforeseen tragedy.

Our life insurance calculator eliminates these financial gaps by employing a Needs-Based Analysis approach. Instead of a one-size-fits-all formula, it provides a comprehensive assessment of your financial situation, considering your income, expenses, assets, liabilities, and future financial goals. This ensures that your coverage is precisely aligned with your actual needs, providing sufficient funds to settle outstanding obligations at the time of death and maintain your family's financial security and lifestyle going forward.

How Does Our Life Insurance Calculator Work?

Our Insurance Needs Calculator considers your marital status, age and current & future financial situation to provide a personalized estimate of the life insurance coverage required.

The calculator will walk you through four steps-

Step 1: Personal Details

Enter your age and your spouse’s age (if married).

Step 2: Financial Profile

Tell us about your family’s income, expenses, assets and liabilities

• Assets include savings, investments or commercial property and exclude primary residence
• Liabilities include loans such as mortgage, student loans, auto loans, or credit card balances

Step 3: Life Goals

Think about all your critical financial goals like children higher education, children marriage and emergency fund. Also give us the existing life insurance coverage you may already have.

Step 4: Calculate Your Estimate

The calculator adds up all your current and potential expenses & liabilities, subtract your existing assets from that total, uses critical assumptions for lifestyle inflation, investment returns & life expectancy and gives the coverage amount.

How Life Insurance Works?

The mechanics of life insurance are straightforward:

1. You choose a policy and coverage amount based on your family's financial needs
2. Pay regular premiums (monthly, quarterly, or annually)
3. Upon your death, your beneficiaries file a claim
4. The insurance company verifies the claim and pays the death benefit
5. Our family can use this money for various purposes like paying off debts, maintaining their lifestyle, or funding children's education

Types of Life Insurance

Term Insurance

Term life insurance is the most recommended type of life insurance due to its simplicity and cost-effectiveness. It offers pure life coveragefor a specified period without any investment component. If the policyholder passes away during the term, the designated beneficiaries receive the sum assured, ensuring financial security for their future.

Traditional Insurance

These policies combine insurance and savings, typically offering lower returns compared to pure investment options. Policies like endowment plans, money-back policies and whole life insurance fall in this category.

Unit-Linked Insurance Plans (ULIPs)

ULIPs combine investment and insurance, with premiums partially invested in market-linked funds. While they offer growth potential, they come with higher risk, multiple charges, and reduced transparency, making them a less favorable choice for most investors.

Which Type of Policy Should You Buy?

We strongly recommend opting for Term insurance. Consider it as your primary choice because it offers highest coverage at an affordable & lowest cost. Its simple and transparent structure ensures you get pure life protection without any investment complexities. Since it focuses solely on financial security, there are no maturity benefits- just reliable coverage when it's needed most. As noted, insurance should be for protection, not investment.

Remember: Buy Term, Invest the Rest!

What Life Insurance Covers?

• Natural death
• Accidental death
• Terminal illness (in some policies)
• Critical illness (if rider taken)
• Disability (if rider taken)

Most policies have a suicide exclusion clause for the initial 1-2 years.

Should We Take Riders?

Riders are optional add-ons that provide extra protection beyond your base policy. Common riders include Critical Illness, Accidental Death Benefit, Disability Benefit, and Waiver of Premium.

Our Recommendation: Stick to essential riders like Critical Illness and Accidental Death Benefit for added security. Avoid overloading your policy with multiple riders, as they can significantly increase premiums without proportional benefits.

Term of the Policy

Select a policy term that covers your working years, ideally until retirement (60-65 years). Key factors to consider include years left until retirement, dependents who rely on your income, outstanding loans, children’s education timeline and future financial needs.

Rule of Thumb: Your policy term should be 60/65 minus your current age to ensure comprehensive coverage during your earning years.

Getting Rid of Bad Insurance Products

If you are stuck with a traditional policy or ULIP, you have two options:

1. Make it Paid-Up - Stop paying premiums while keeping the policy active with reduced benefits. This is possible after paying for the minimum required years (usually three).
2. Surrender the Policy - Cash out early but be mindful of surrender charges that may reduce the payout.

Life Insurance For Children

We commonly see people buying life insurance policies in the name of children believing it offers financial security for them. However, this is a misguided approach. Firstly, children have no income to protect and insurance should cover earning members only. Secondly, it gives sub-optimal returns as compared to other investment options.

There are better alternatives available for saving for children. Options like mutual funds through SIP, public provident fund (PPF), sukanya samriddhi account (for girl child) and fixed deposits can be considered

Who Should Buy Life Insurance?

Who Should Buy:

• Primary Breadwinners- To secure their family’s financial future.
• Individuals with Financial Dependents- Spouses, children, or elderly parents relying on their income.
• People with Large Debts- To prevent liabilities from burdening loved ones.
• Business Owners with Liabilities- To protect partners and ensure business continuity.
• Single Parents- To safeguard their child’s financial well-being.

Who May Not Need It:

• Unmarried Individuals with No Dependents- No financial obligations to cover.
• Children- No income to protect.
• Retirees with Adequate Savings- If assets are sufficient for dependents.
• Wealthy Individuals with Substantial Assets- If dependents are financially secure.
• Non-Earning Spouses- If the household’s financial stability doesn’t depend on them.

Key Takeaways

1. Buy term insurance as your primary life coverage
2. Avoid mixing insurance with investment
3. Calculate adequate coverage with the help of the Life Insurance Calculator (above).
4. Buy early in life to lock in lower premiums
5. Disclose all medical conditions truthfully
6. Review coverage periodically as life circumstances change
7. Focus on protection, not returns

Consult Your Financial Advisor

While life insurance calculators offer a great starting point, seeking expert advice ensures your coverage aligns with your unique financial situation. A financial advisor or insurance specialist can provide deeper insights and help refine your policy based on detailed financial planning and personal needs.

Remember, life insurance is not an investment - it's a protection tool for your family's financial security in your absence.