Many investors regularly review their investment portfolios, but unfortunately, insurance portfolios often get overlooked. It’s important to review your insurance coverage to ensure your family is financially protected at all stages of life. Here’s a comprehensive guide to understanding how and when to adjust your term life cover based on life events and financial milestones.
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Why Reviewing Your Term Life Insurance Is Crucial
Your life situation is constantly changing—whether it’s a new job, marriage, or a growing family. Regularly assessing your term life insurance is essential to ensure that the protection aligns with your current financial circumstances and long-term goals. A quick annual review can provide clarity and help you make necessary adjustments before you hit significant milestones.
When to Increase Your Term Cover
Certain life events often bring new financial responsibilities. These are the times when you should consider increasing your term life cover:
- Marriage: Tying the knot usually brings more financial obligations, and your insurance cover should be adjusted to reflect this change.
- Welcoming a Child: The arrival of a new family member increases your dependents, and your coverage should increase accordingly.
- Home Purchase: A new home purchase often comes with a hefty home loan. Ensure that your term life cover increases to cover the loan and your family’s needs.
- Career Growth: As your career progresses and your income grows, your family’s lifestyle will change. Adjusting your term cover will provide a cushion for any unforeseen events.
When to Consider Reducing Your Term Cover
While it’s important to increase coverage during significant life events, there are also instances when reducing coverage might make sense:
- Paying Off Debt: If you’ve cleared major debts such as a home loan, it might be time to reduce your term cover accordingly.
- Financial Independence of Dependents: If your children or dependents are financially independent, their reliance on your income may decrease, and you can reassess your coverage needs.
- Achieving Financial Stability: Once you reach a certain level of financial security, you might find that your coverage needs are lower.
However, if you wish to ensure a financial legacy for your heirs or help them cover potential medical expenses, maintaining sufficient coverage is advisable.
Important Factors to Consider in an Insurance Policy
- Policy Duration: Ensure that your coverage is aligned with your financial responsibilities. If you plan to work until the age of 70 and someone in your family will rely on your income, make sure your term cover lasts until that point.
- Premium Affordability: Regularly check if your premium is sustainable over the long term. If you find your current sum assured insufficient, consider purchasing an additional policy.
- Adding Riders: Riders, like accidental death benefits or critical illness cover, can be added on your policy’s anniversary. If you work in a high-risk environment or have a family history of illness, adding these riders can enhance your protection.
Health Insurance Coverage: How to Stay Protected
Health insurance coverage is just as important as term life insurance. Regularly assess your health insurance policy to ensure it meets your family’s current and future healthcare needs.
Evaluating Your Sum Insured
Your sum insured should be large enough to cover your family’s healthcare costs, considering factors like:
- Family Size
- Location (Healthcare costs are higher in metropolitan areas)
- Preferred Hospital Grade
As medical inflation continues to rise, financial experts recommend a floater cover of at least ₹15-20 lakh for a family of three (with the eldest aged 35).
Why Start Early?
Planning your health insurance coverage at a young age is key. When you are healthy, it’s easier to increase your sum insured. However, once you have health issues or begin making claims, your insurer may restrict your ability to raise the coverage amount.
Should You Increase Your Base Sum Insured or Go for a Super Top-up?
- Increase Base Sum Insured: It’s usually better to increase your base policy’s sum insured as it keeps the policy terms unchanged.
- Super Top-up: Though cheaper, a super top-up plan may have different terms and conditions, making it harder to claim. Super top-ups are better suited to handle critical illnesses, while base plans should cover common ailments.
Keep an Eye on New Features
Insurance companies are constantly adding new features. Some may be highly beneficial for you:
- Teleconsultations & OPD Treatments: Newer policies may offer these features, which can save time and money.
- Recharge Benefits: If one family member exhausts the sum insured, plans with recharge benefits will refill the coverage.
- Super No-Claim Bonus (NCB): Some insurers offer up to a 100% bonus on the sum insured if no claims are made. This bonus can help extend your coverage.
Understanding Insurance-cum-Investment Plans (ULIPs)
ULIPs (Unit Linked Insurance Plans) are a combination of insurance and investment. But before you dive into these plans, here are some things to consider:
Performance Evaluation
When assessing a ULIP, compare its performance against a relevant benchmark like Nifty 50 for large-cap funds. If your ULIP’s long-term returns consistently underperform the benchmark, consider switching to a different fund within the same insurer.
Lock-In Period & Penalties
Keep in mind that ULIPs have a mandatory 5-year lock-in period. Withdrawing or surrendering the policy early could result in heavy penalties and significant loss of investment.
Pros and Cons of ULIPs
While ULIPs offer insurance and investment benefits, they come with several disadvantages:
- High Charges: ULIPs come with high management charges, such as premium allocation fees, fund management fees, and policy administration charges, which can reduce the potential returns.
- Lower Returns: Due to these charges and market risks, ULIPs often provide lower returns than pure investment products like mutual funds.
- Complexity: The combination of insurance and investment can be confusing, especially for those without a strong financial background.
- Insurance Coverage: If your primary goal is life insurance, ULIPs might not offer as much cover as a traditional term insurance policy.
Do check out my other article on what basically ULIPs are and what are the key points that we should consider before buying it.
Conclusion: Regular Reviews and Adjustments Are Key
To ensure that your insurance coverage remains aligned with your evolving financial responsibilities and lifestyle changes, it’s crucial to review your term cover, health insurance, and ULIPs regularly. By staying proactive, you can safeguard your family’s future while optimizing your insurance and investment strategies.
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