Have you ever been confused as to whose name you should take a life insurance policy on ? You argue that it is for the future of your family, wife and kids, so it needs to be on their name. And you think that it’s really a no brainer as to who should buy life insurance and purchase different types of life insurance policies for everyone in your family.
But is that really the case?
Smart financial planning is more about the right strategy than about the right products. And the right strategy will help you answer this looming question on whose name should life insurance policies be bought.
Who should buy life insurance ?
A common myth that exists today is that a person should be buying life insurance policies for his wife or children. That is because it will help them secure their future.
This notion is milked high and dry by life insurance agents who use the emotional angle to sell, or rather mis-sell policies to gullible investors.
In fact the life advisors use this tactic to sell policies to everyone in the family. That is more sales for them. More sales means more commissions. It also means more and more ignorant investors who are making this mistake over and over again.
To get this right, first understand what the intent is of taking life insurance. If your answer is to grow rich or to save money for the future, throw a glass of cold water in your face and ask yourself this – Why do you have an insurance for you car or for your two wheeler ?
Well, so that if there are damages to it or if it is stolen then someone can pay money to you to replace the damages or the vehicle itself. So insurance is for protection. It is to bring you back in the same economic condition as you were in before the loss occurred.
The same analogy holds true for life insurance.
It is for protection so that when someone in the household dies, the others are given a lump sum money to spend on for daily living expenses and future financial goals.
But if the non working member, possibly the house wife, dies, then the earning member, the husband is already drawing a salary each month and he does not necessarily need a payout from the insurance company. His earnings are enough to take care of all discretionary expenses and the future goals of the children like education and marriage.
The same is not true when the earning member dies. When such an eventuality happens, income to the household stops. The rest of the surviving family members need some money from somewhere (insurer) to continue with their lives.
What you can infer from this is a very important conclusion :
Life insurance should be taken on the life of the earning members in the family. So that the non earning members can continue with their life with the payout the life insurance company offers.
Life Insurance should not be taken on the names of non working members of the family.
This myth needs to be cleared out by you now otherwise you will continue to be cheated by life insurance product sellers especially during the tax season.
But I need to save for my future ?
If you are caught in the insurance is investment quagmire, then you need to take a serious look at your concepts of personal finance.
Insurance is for protection. Full stop. It is not meant for investments.
It’s a different story that in India, insurance has been a vehicle for saving for the future. But you are the investors who need to change this as it is in your interest.
You are much better off with systematic investment planning of mutual funds to save and invest your money. That will possibly fetch you a 10-12% easil. LIC wil give you a deplorable 3% – 6%.
It’s better to clear this myth now. Be a smart investor than repent later with innumerable insurance policies credited to everyone in the family.
Note : This article has been written at the back of a financial plan I was making. This family has many policies but none on the name of the primary bread winner !
Radhey,
Agree but most of these policies are sold by greedy agents who want commissions. I was approached by many such agents to buy policies for my family members but i politely refused them.
Only the bread-winner should buy life insurance for himself & Health Insurance for all family members.
Rakesh
@Rakesh, Once I asked so many questions from a life insurance agent that he ended up taking recommendation from me for himself but I know to make a living he would have sold non term plans to others.
@Radhey,
Lol… Did he knew that you were a CFP ?
@Rakesh, Yeah I told him. 🙂
Nice article Radhey.
Just curious to know, whom should opt for insurance if both husband and wife are working, which is too common in today’s scenario?
@Nikhil Mittal, I think both should take insurance as the lifestyle and expenses of working couple would have been moulded as per the double income. At the same time be wise and do not over-insure. In my opinion accidental insurance is a must for both to cover the disability factor, which according to me is the worst that can happen to anyone.
@Vivek K, So though the article was talking about life insurance, you are right that accidental insurance is also a must.
Read this – https://www.thewealthwisher.com/2010/09/19/3-insurance-policies-you-cannot-afford-to-miss/
@Nikhil Mittal, Both actually. Remember in such a case, the lifestyle is more enhanced generally. So both the couple and kids gets used to a better lifestyle and if suddenly one person is not around, adjusting to a lower lifestyle is difficult.
The payout from the insurer is helpful in such cases.
Hi Radhey,
There is no doubt about the point you have made to have life insurance of working members only. But I feel “comprehensive” accidental insurance [which can be considered as a subset of life insurance] of spouse, working or non-working, should be taken. In case of any accident and any permanent/temporary disability of spouse, it will of great help to cover the extra support needed to look after the spouse and children.
What are you views on this?
@Vivek K, oops, didn’t notice your previous response above 🙂
Sir, need your clarification on the indexation benefits for a 90 day FMP purchased in the month of Feb 2012 & matures in the month of May 2012.Can I claim indexation benefit since it is maturing in the next financial year?
@Muthu, No, this is short term capital gain. Indexation is applicable only on long term capital gains.
Read – https://www.thewealthwisher.com/2011/01/30/long-term-and-short-term-capital-gains/
and
https://www.thewealthwisher.com/2010/09/07/what-is-cost-inflation-index-and-indexation/
more.
Nice Article RAdhey.. One query..
It is usually suggested that during financial planning,one should take Life Insurance + Accidental Insurance + Health Insurance (Mediclaim) + some top up plans.. Can we know “ideally what percentage of one’s income should be spent on the total insurance”. I mean is there any ideal ratio for Total Insurance:Income (just like EMI:Income ratio)
@Aparna Nema, OK I will do an article on this for you, again !!
@Aparna,
Some planners say that life insurance sum assured should be 10 times your gross income. Radhey had done an FAQ on insurance, hope it helps-
https://www.thewealthwisher.com/2011/02/03/queries-on-life-insurance-answered-part-1/
Thanks for the important piece of info.
Suppose in a family the husband is the earning member (already insured), wife & children are the non working members so should there be no life insurance taken for the wife (& for the children once they become 16/18+ of age)?
@Sudip D, Yes – no life insurance to be taken for wife and children.
Hmm.. Point noted. 🙂
LOL, laughing on myself. I thought non-earning members may not get life insurance itself (practically).
@Chirag, But people often ask for it because they want to provide for their near and dear ones.
Also remember that insurers can sell it to non earning members but then the policies might have zero “protection”.
@Radhey,
Very true. I have colleagues who have over two policies in their wife & child’s name. They just bought them in panic during the Jan-Feb deadline and don’t know what to do.
@Radhey Sharma, Got your point Radhey. Understood correctly.
I’m a 23 year old single girl who is starting her first job. I earn 9L per annum and have no dependents(my parents are very well off). I have just started paying off my education loan of 10L but there is a LIC policy attached to the loan (if I die before paying off the loan, the proceeds of 10L from the policy will be used to pay the loan and rest is given to my parents). I don’t have any other debt or liabilities. So I see no need for life insurance. But I know that starting early will get me a low premium on term plans. Should I opt for term insurance and if so, for what cover?
@Sheela, The only reason you need a term plan now is to pay the education loan but that is already taken care of through the LIC policy.
So you don’t have to take a term plan simply because it is cheap when you are young.
Take things when they suit you not because they are inexpensive.
The premium was is already on and for all you know, with years passing by, though the premium for you will increase as you age, it will also decrease because of competition. So don’t worry, enjoy your life.
And invest wisely, you are starting early and have time on your side.
@Radhey Sharma,
Thank you for hte advice
@Sheela,
Congrats on your first job and good to hear that you are interested in financial planning. Radhey has written some wonderful articles, do they time to read them and you can plan out well.
Agree on what Radhey has mentioned about term plans.
@Sheela, A few suggestions from my side that you may consider: –
1) Before starting to invest learn the basics of financial planning and income tax. You can find many articles in the archives section of this blog. The ones I’d recommend to start with are: –
https://www.thewealthwisher.com/2010/06/02/three-basic-steps-towards-financial-planning/
https://www.thewealthwisher.com/2012/01/17/smart-ways-to-save-income-tax-in-india-in-2012/
https://www.thewealthwisher.com/2010/10/13/systematic-investment-plan-sip-of-mutual-funds-the-basics/
You may also consider buying jagoinvestor book.
2) Consider opening PPF account.
3) Consider investing in MFs via SIP. You can find recommended MFs in the archives section again.
4) Consider taking accidental and health insurance, not life insurance.
5) Most importantly enjoy your life while you can and don’t stress too much on all this.
6) Keep visiting wealthwisher. 🙂
Which company are you working for? Their pay scale seems to be pretty good, any openings? LOL! 😀
All the best with your career and happy investing!
@Vivek,
Thanks for the detailed advise, what a good way to start.
@Rakesh, Thanks for appreciating.
@Vivek K, Thank you for the advice. I’m an MBA in finance, so I’m clear on the finance basics. I was looking for practical advice and tips.
@Sheela, Just curious here what do they teach in MBA in finance ? Does it include corporate tax structure as well ? Or is it concentrated only on finance for individuals ?
@Radhey Sharma, We learn the basics of corporate finance compulsorily and then we get to choose the electives related to the areas that we are interested in. I had opted for Mergers, Acquisitions and Corporate Restructuring, Financial Services, Security Analysis and Portfolio Management (fundamental and technical analysis) etc. Its actually ironic that we learn very little about personal finance in our MBA.
@Sheela, Thanks for you answer.
@Sheela, Good to know Sheela that you are finance background. I hope the above tips were of some use.
You should keep visiting this blog and share your knowledge with us. 🙂
@Sheela,
Good to hear you could benefit from wealthwisher, now its your turn to go out and spread the word…
@Vivek K, I would love to share what I know. I know the theories well and I would like to learn the practical ins and outs of personal finance from you guys.
@Sheela, That’s good spirit Sheela. Keep visiting this site and participate in various discussions with us. We can definitely learn from each other. Looking forward to it. 🙂
@sheela,
Good work, first we had Aparna and now you. Slowly but surely the number of participation from Women readers are increasing. Hopefully we should have more in coming months.