Why is life insurance important?

A life-insurance policy provides financial protection and peace of mind for your family and dependants in the event of your death. It ensures:

· Financial security for dependants: Life-insurance policies serve as income-replacement products, replacing the income of the deceased policyholder. They ensure that the dependants can maintain their standard of living.

They also assist dependants in paying off debts such as mortgages and loans, thus preventing them from being burdened with these liabilities.

· Generational wealth: A life insurance policy is a powerful tool for creating generational wealth, as it not only provides financial security for families but, more importantly, provides a foundation for future generations. The proceeds from the policy can be used to fund education for children and grandchildren, providing them with better opportunities and a solid financial foundation.

Beneficiaries can also invest the proceeds from the policies in various financial instruments, such as real estate, businesses, stocks and bonds to grow their wealth over time.

· Business continuity: Life-insurance policies and business continuity are closely related, especially with regard to small to medium-sized enterprises (SMEs) and family-owned businesses.

The policies on key employees, such as business owners, whose deaths would significantly affect the business, provide the funds necessary to help the business cope with the loss and maintain operations.

The policies can also form part of a broader succession plan, providing the finances necessary to transition the business smoothly to the next generation of new leadership.

How much life insurance do I need?

To determine how much life insurance you need, you should do a thorough analysis of your current financial situation, future needs and goals.

You should determine the number of years your beneficiaries will require financial support, and multiply your income by that number.

Additionally, you should include any debt that could burden your family and dependants. Future expenses such as children’s education and investments should also be considered.

A simple rule of thumb is to buy a life insurance policy that is ten times your annual income.

Do I need a life insurance policy if I have some coverage through my employer?

Yes! While it is a good idea always to take advantage of employee benefits such as group life insurance, it may not be sufficient to provide for your dependants in the long run.

Employee benefits usually end when you switch jobs, so it is always necessary to have individual insurance policies.

Individual insurance policies also offer more flexibility, especially in terms and coverage, compared to group plans.

Can I have more than one life insurance policy?

Yes! Many people choose to have multiple life-insurance policies to meet their needs better.

As different policies can be tailored for specific needs, such as covering a mortgage or leaving an inheritance, many people will appreciate the flexibility in adapting coverage to their various responsibilities.

As term insurance policies are generally cheaper than whole-of-life insurance policies, combining them can be a cost-effective way of ensuring all financial obligations are covered.

This column by Nutan Ragoobir, a senior insurance professional, author and founder of the Girmitya Foundation will appear bi-monthly in Business Day.