Gaurav Suri* tells you everything you wanted to know about life insurance but did not know who to ask.

There is an old joke about an insurance buyer's dilemma. A salesman was keen to sell life insurance to an old American farmer. But every time he went to the farm, the farmer kept stonewalling him. After repeated attempts, the young salesman finally asked the farmer, " But why don't you want to get yourself insured?" The old farmer's reply stumped the younger man. Looking the eager salesman in the eye he said, "Well son. The way I figure it, if I live, I don't get any money back. And, to get the money, I'd have to be dead first. Either ways, I lose."

But life insurance is is not about getting your money back; nor is it a savings instrument. Instead, it is a financial resource for your loved ones in the case of an unforeseen eventuality. You enter into a contract with an insurance company that promises to provide your beneficiaries a certain amount of money upon your death.

In return you make periodic payments called premiums. The size of the premium is generally based on factors such as your age, gender, medical history and the amount of life insurance you wish to have.

Some policies may require a medical examination before the premium amount is decided. Certain types of life insurance may also provide benefits for you and your family while you are still alive. Policies such as whole life or universal life accumulate the cash value on a tax-deferred basis, and that value can be used to supplement your retirement income or help provide for your child's education.

Given the uncertainties of daily living, life insurance becomes a useful part of everyone's financial portfolio. Financial advisors often recommend developing a financial plan that includes an appropriate amount of life insurance as part of a comprehensive strategy for financial security.

Do I need life insurance?
Your income can be considered your family's most valued asset because it allows you all to obtain the necessities of life and, of course, all the creature comforts. But some day you may not be there to provide the income - yet your dependents would need the income. This is where a life insurance proves useful for them. The amount required will depend on your personal and financial circumstances. If any of the following statements applies to you, you probably need to consider life insurance:

1. You have a spouse
2. You have dependent children
3. You have an ageing parent or disabled relative who looks upon you for support
4. Your retirement pension / savings are not enough to ensure your spouses future against a rising cost of living.
5. You own a business

In addition to the comfort of knowing that you have provided for your family in case of an eventuality, there are several other reasons

• Deferred tax benefits on the insurance policies
  
• Access to funds available through whole life policies, etc, where you can borrow money for big ticket expenses.
  
• You can gift it or use it to divide your estate ie pass it to a beneficiary in your will.

How much is enough?
A good financial advisor can help you with a "need analysis" through which you can estimate your permanent and temporary liabilities, look at the availability of emergency funds at your disposal, your liquid assets and then estimate the insurance cover you require.

A good life insurance policy can even help you overcome financial problems and further provide the assurance that your dependants are taken care of after you. It is only natural that you should wonder what should be the appropriate value of the insurance you need. Also remember that your insurance needs change through different stages of your life.

When you are young, there is a lower need for life insurance. However, as you grow older and your responsibilities to your family increase, so do your life insurance needs. Therefore, you will need to review your coverage requirements approximately between four and seven times in a lifetime.

Basically, the amount of insurance one should buy is directly dependent on what is best described as your economic value, otherwise known as the 'human life value'. This varies from person to person. The human life value is the capitalised value of the net earning of the individual for the rest of his working life

It is, in short, the present value of the total income of the individual, which is lost to the family in the event of his untimely death.

Earnings of an individual till retirement

For Example
X, aged 25, earns a gross income of Rs3-lakh per annum and would retire at the age of 60. In case of his passing away at the present age his family would stand to lose his future income, which amounts to Rs1.05 crore (the remaining 35 years x Rs3 lakh per year). This lost income of Rs1.05 crore is the "human life value" of X.

The amount of life insurance you would require is evident from this exercise.

Which type of life insurance policy?

There are several types of insurance and there are many decisions you will have to make when assessing your life insurance needs.

The first of which, is whether you need whole life or a term insurance / universal plan. A simple way to understand the differences between these two types of life insurance is by comparing them to something familiar to all of us.

To take a very simple example, think of buying a whole life insurance product as owning a home and buying term insurance as renting one. There are advantages and disadvantages to both.

Like owning property - owning whole life is usually an appropriate way for people to meet their long term needs. Over time it may be the least expensive form of life insurance since payments may be fixed and it builds equity. Plus this equity (called the cash value) accumulates on a tax deferred basis. In contrast, purchasing term insurance, like renting property, is usually an appropriate way of meeting short-term or temporary needs.

Taking the analogy further the differences are highlighted as - living in owned premises versus living in rented premises:

*The author is marketing director, MetLife India Insurance.