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You count every rupee that goes towards meeting your expenses so that you can save alongside for future life goals—whether it is buying a house, educating the kids, or building your retirement fund. But does it also bother you how the family will get on if you are not around? One solution to this could be buying a savings policy that combines the advantages of life insurance and investment that helps you meet your short- to medium-term financial goals.
So what exactly is a savings policy? And more importantly, how do you calculate what to put aside towards such a policy to ensure sufficient life cover and decent assured returns on your investment? Read on to find out:
For those wondering if insurance can be a form of investment, a savings policy is a life insurance product with an investment component that encourages financial discipline in a policyholder through long-term savings.
A typical savings policy offers the insured:
Guaranteed# returns on investment either during the policy term or upon maturity.
Life cover throughout the policy term.
Optional riders1 for further coverage.
A savings policy could either be an endowment savings plan, a money-back savings plan, or a unit-linked insurance plan.
All the savings policies mentioned above serve the dual role of an insurance and investment product. However, there are subtle differences between the products themselves. The savings policy that will best suit your needs depends on your financial goals.
A policyholder who survives the term of an endowment savings policy gets a lump sum amount (sum assured and any accrued bonus2) when the policy matures. It is an ideal scheme if you are looking to arrange for a sizeable lump-sum payout in the medium- to long-term to fulfil a significant financial milestone.
In a money-back policy, the policyholder receives a pre-determined percentage of the sum assured at regular intervals during the policy term. This scheme works well for anyone looking for a second source of income while the policy term is in force.
Traditionally, agents use the Human Life Value (HLV) approach to calculate insurance needs, where insurance is in multiples of earned income. The theory behind this is that insurance should replace the loss of earnings after the policyholder dies.
This method, though widely applied, is not an ideal method to determine insurance needs. For example, the calculations do not account for future circumstances and the financial needs of the beneficiaries. When calculating the insurance needs of beneficiaries, it assumes that the current income earned provides a satisfactory standard of living, which will remain the same going ahead.
A more appropriate method to calculate the required life insurance amount would be determining the financial needs of the surviving family members—the immediate need for cash if the insured dies and expenses after that. Professionals refer to this method as the Needs Approach.
A basic calculation based on the needs approach looks like this:
The life insurance needs of a family = Cash for costs immediately after a policyholder's death + The present value of family's needs – Available assets
The needs approach intuits the future financial needs of the beneficiary (surviving spouse). It divides the life of a surviving beneficiary into various phases—the readjustment phase after the death of an insured, child dependency phase, their needs post-child dependency phase, up to retirement, and the retirement phase.
All financial calculations that attempt to anticipate future needs consider the rising cost of living, also referred to as inflation, which rises at an average of 4% -6% per annum.
The needs approach provides a more realistic picture of the anticipated financial needs of a family.
Rules of thumb are another set of simple guidelines by which an individual can quickly determine his/her life insurance amount. While the insurance industry has far more sophisticated methods to determine an individual’s insurance needs, rules of thumb are a good place for a person to get started.
Income rule: This determines one’s basic insurance needs as six to eight times his/her gross annual income.
Income plus expenses: As the name suggests, this determines one’s insurance needs as five times their gross earnings plus any significant expenses, such as a personal or home loan, school or college fees, etc.
Premiums as a percentage of income: This rule of thumb calculates the premium that one should spend/incur instead of defining the insurance coverage required. According to this rule, 6% of the potential policyholder’s gross income and an additional 1% for each dependent should be set aside as insurance premiums.
As mentioned earlier, rules of thumb are good to get a rough idea of one’s insurance needs with a few clicks on a simple calculator. However, it does not provide an accurate picture of how much you can or should spend on insurance. This is because the formulas do not allow for any special considerations concerning one’s life. They do not consider whether the family has more than one source of income, the actual ages of the policyholder and dependents, unexpected but significant expenses, etc.
The insurance industry has several specific methods to determine one’s insurance needs that include but is not limited to the family needs approach, capital retention, and capital liquidation approach.
Insurance planning is a crucial part of financial planning. The moment you embark on your professional journey is an ideal time to consider a savings plan. Such plans provide you with life cover and give you an early head start at savings for your future financial goals.
Check out Tata AIA Life Insurance that offers various savings solutions with advantages of life insurance and long-term savings with guaranteed# returns. The plans come with additional features like tax* benefits, the flexibility on premium payments schedule, and the option to avail of a loan against certain policies.
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*Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.
#Guaranteed Returns/Payouts depend on Plan Option, Policy Term, Premium Payment Term and Age at entry.
1Riders are not mandatory and are available for a nominal extra cost. For more details on the benefits, premiums and exclusions under the riders please refer to the Rider Brochure or contact our Insurance Advisor or visit our nearest branch office
2These bonuses are not guaranteed in nature. The Company may declare Cash Bonus rate annually in advance. The Cash Bonuses if declared, will be applicable provided all due premiums have been paid.
IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER.
THE LINKED INSURANCE PRODUCT DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICY HOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.
Past performance is not indicative of future performance.
All investments made by the Company are subject to market risks. The Company does not guarantee any assured returns. The investment income and price may go down as well as up depending on several factors influencing the market.
Please make your own independent decision after consulting your financial or other professional advisor
Insurance cover is available under the product.
The products are underwritten by Tata AIA Life Insurance Company Ltd.
The plans are not a guaranteed issuance plan and it will be subject to Company’s underwriting and acceptance.
For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.
This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. This document is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life Insurance shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.