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What Is Wealth And How Can You Build Wealth with Life Insurance?

dateKnowledge Centre Team dateNovember 18, 2020 views120 Views
What Is Wealth And How Can You Build Wealth with Life Insurance?

Are you wealthy? Would you consider your parents wealthy? Do you think you will acquire wealth one or two decades later? If yes, it’s time to think how.

Eyeing a wealth goal is a reasonable aspiration. However, like any other destination, you need to know what it looks like to be able to ascertain whether you arrived at the right place. So, you need to define your savings goal that eventually becomes your wealth. Fortunately, there is more than one way to do so, including pension plans, saving life insurance etc.

What Does Wealth Mean?

Meaning of wealth could be different for different investors. For some, the precious metal is wealth, while for others it could be a valuable real estate. However, scientifically both of these investors may have wealth but that may not make them wealthy.

The real meaning of wealth should be to have enough money to fulfil your needs and meet your financial goals and aspirations when you need it.

Meaning, you may not be a billionaire now, but if you can:

  • Pay the down payment of the house property you dreamed of a few years ago
  • Fund your child’s goal of attending the top b-school in the UK
  • Comfortably sip your coffee at the age of 60, knowing you are going to live well into your well-funded retirement

You are wealthy, and you have built the wealth you need. What does wealth mean for you?

How to Build Wealth?

Building wealth is a long-term consistent effort, considering you are starting from zero. But, with a little plan and clarity on your financial priorities, you can build considerable wealth during your earning years. Before you begin the journey of building wealth for yourself, you should keep the following financial principles in mind:

  • Wealth building is a boring activity if it is entertaining to check for faults in your wealth plan
  • Long-term wealth should take priority over present expenses
  • Your involvement in the saving and investment management should be nominal.
  • Do spend time in understanding your long-term investment choices before investing for a peaceful investing experience
  • Convert your savings to investments as soon as possible

Here are a few important steps you need to take to start on this journey:

1. Budget Your Expenses for Savings

You need to decide a savings ratio before you start splurging your income. Although, the higher your savings ratio the better, it does not mean you should try saving 90% of your income. However, if you can manage that, nothing else is better!

  • At least 10% of your income must go towards your retirement goal, even if you are already contributing through NPS or PPF
  • Minimum savings ratio should be 30% (including retirement savings) of your in-hand income
  • 50% is the most optimum savings ratio

2. Put the Contingency Plan in Place

A contingency plan is to ensure that your investments remain unaffected due to health or accidental emergency. So, here are the things you need to do for a good contingency plan:

  • Purchase adequate life and health insurance cover. Life insurance cover should be 10 to 15 times your annual income. While health cover could be the best you can secure within your budget.
  • Create an emergency fund. An emergency fund should be equal to six-nine months of your necessary expenses including insurance premiums, EMIs and house rent if applicable.

3. Start Investing Your Savings

Once your contingency plan is in place, you can start investing your savings towards long and short-term goals.

  • Short-term investments: These are the goals you need to meet within five years. Best investment options for these goals are bank FDs, debt funds, etc.
  • Long-term Investment (Except Retirement): You can use the tax-saving investments like equity-linked saving scheme (ELSS), unit-linked insurance plans (ULIPs), provident fund (PPF), guaranteed saving plans for long-term goals.

    If you have important life goals like child education and marriage, you can use plans like ULIP and guaranteed savings plans. These plans will help you fulfil the child’s goal while you are alive and even if you are gone too soon.

  • Saving for Retirement: You may already have an NPS or EPF subscription which continues with your salary. You need not stop or change anything with this investment. However, you should add an investment plan like a unit-linked insurance plan to your retirement investments. Here’s how ULIPs help your retirement goal:

    o You can invest till the age of 100. Thus, you can start at 30 and continue the same plan throughout your life

    o You can create a monthly pension from ULIP plan, using the systematic withdrawal feature after the age of 60

    o The pension is virtually tax-free as withdrawals from ULIPs are exempt under section 10(10D)

Thus, ULIPs can help you create a tax-free pension after you retire. Whereas, the pension from annuity plans will be taxable at the slab rates.

4. Review Your Insurance, Savings & Investments

You should review and upgrade your insurance cover with your income and lifestyle growth. You also need to ensure that your savings ratio either remains consistent or grows with your income.

Similarly, you need to check the progress of your investments towards your goals from time to time. Increase the investment to the goals which are lagging. You will easily know if you have surplus savings, start a new wealth goal with it.

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Frequently Asked Questions (FAQs)

The premium is one of the most important factors to consider before buying a policy. Many people buy a life insurance policy with a high sum assured but are unable to process the premiums for the entire premium payment tenure. You can get a better idea of the premium outgo with the premium calculator available in the 'Tools and Calculator' section of www.canarahsbclife.com.

Life insurance plans come with several riders which increase the efficiency of the policy for the buyer. For instance, if you have a history of terminal illness in your family it would be advisable to opt for terminal illness rider with your term insurance. Riders or add-ons help in customising the standard policy benefits for the requirement of different families. The iSelect term insurance plan comes with a built-in cover for terminal illness, and option for protection against accidental death or disability. You can also opt to cover your spouse's life under the same policy by paying an additional premium.

Insurance companies calculate the premiums based on several factors such as age, gender and occupation.

Age:It is one of the biggest factors that influence life insurance premiums. Premiums tend to be low when the life insured is younger as the chances of contracting diseases is low. Young people also opt for policies with longer tenures and pay premiums for a longer duration, which makes the policy cheaper for young people.

Gender:The insurance premium for women is generally lower when it comes to life insurance plans. Women live longer and pose a lesser risk of a claim leading to lower premiums for them.

Lifestyle habits:The premiums for people who smoke or drink is always higher due to higher health risks.

Policy term:Policy terms are also taken into consideration by insurers while deciding the premium amount. Policies with longer tenure are cheaper as compared to short-duration policies.

Mode of purchase: The platform that you use to buy the policy also determines how much you will have to pay for the plan. People who buy life insurance policies online have to pay lower premiums as compared to offline policies.

Occupation:The nature of your work is an important factor that influences the premium amount. Certain occupations like shipping and mining are considered more dangerous as compared to jobs in services industries. The insurance premium rises with the risk profile.

Processing life insurance claim is a transparent and smooth process with Canara HSBC Oriental Bank of Commerce Life Insurance.

In case of the death of the life insured, the nominee will have to intimate the company by filling a Death Claim Form and sending it to the nearest branch office.

Once the form is received, the claim is registered by the insurer.

After the registration of the claim, the company will send the claims pack along with the related forms such as physicianâ s statement form and employer certificate that need to be filled.

Along with the duly filled forms a few documents such as original [policy document, death certificate, copy of bank passbook, hospital or treatment records, photo identification and address proof have to be provided.

The claim is processed on the submission of relevant documents. Once the documents are verified, the claim amount is released post all due diligence.

Household expenses rise with age. The cost of children's education increases along with other lifestyle expenses. The iSelect term plan offers an option to increase the cover according to the life stage. If opted, the insurance cover increases by 25% at every 5-year terminal till the 20th policy year.

Even though a life insurance policy is bought to protect your family in your absence. There are chances of the claim being rejected due to several factors.

False information: If the policyholder provides false information or conceals important information while buying the policy, the insurer has the right to reject the claim after his/her death.

Type of death: Deaths due to suicide in first policy year, intoxication or pre-existing disease is not covered under life insurance.

Premium payment: The payment of premiums on time is of utmost important to avail the benefits of life insurance. Life insurance policy may lapse on the failure to pay the premiums

Nominee details: An insurance company can put the claim on hold if the nominee details have not been filled or not been updated by the policyholder.

Suicide: If the life insured commits suicide within 12 months of buying the policy, the insurance companies generally pay 80% of the total premiums paid.

Buying life insurance online is not only safe but a better option. Online life insurance policies have lower premiums and the individual is not required to visit the insurer's branch or a bank. Online insurance policies also offer higher benefits. Customers should, however, buy online policies only from credible insurers and should check for SSL certificate on the website to ensure that the website is legitimate.

The cost of life insurance policies varies depending on factors like age, gender and occupation. The average cost of life insurance plans, especially term plans, is very low compared to the amount of coverage offered.

An individual is allowed to have multiple life insurance policies. People opt for more than one policy to increase the cover or avoid claim rejection. In case of multiple policies, even if the claim is rejected by one insurer, the beneficiaries may receive the benefit from a different insurer.

Life insurance policies are of different types. In the case of unit-linked or endowment policies the policyholder receives the maturity benefit at the end of the policy term. However, in the case of term insurance plans, there are no maturity benefits. The death benefit is only paid out after the death of the life insured.

When you buy life insurance, the insurance company asks for the nominee details. Only the person named as the nominee in the policy can cash out a life insurance policy in case of death of life insured.

A life insurance policy is generally taken for a specified period. After the policy duration of a term plan gets over, the policy simply terminates and ceases to exist. However, in the case of unit-linked plans or endowment, you can use the policy as a tool for retirement planning and the accumulated corpus is used by the insurer to pay you monthly amounts for your entire life.

If a policyholder purchases a term plan for 25 years and dies during the policy term. The family receives the death benefit. In the case of iSelect term plan, the policy provides four payment options to the beneficiaries. If the regular payment options are chosen the policy works as a source of regular income.

It is a popular misconception that life insurance is only for accidental deaths. A term life insurance plan like iSelect also covers terminal disease along with death. A terminal illness cover is important as health insurance pays only for the cost of treatment and hospitalization, but a terminal illness cover pays you a lump-sum amount which takes care of other expenses. On the other hand, unit-linked policies such as Invest 4G cover death and also provide decent returns for other financial goals such as buying a house of child's education.

It is ideal to buy life insurance in your early 20s because it’s is the time when people have just started with their professional life and so there are lesser responsibilities and financial liabilities to take care of. Also, if you buy life insurance at this age, you will be paying relatively lower insurance premiums since it’s a due fact that mortality rate in case of young people is low. And that is why insurance companies offer lesser premium rates to younger people as they think that they are most likely to be fit and healthier with less chances of filing a claim in future.

Once you have cancelled your life insurance policy, you will instantly lose your life insurance cover. Afterwards, your insurance company will get in touch with you and ask for valid reasons regarding the cancellation of your policy. In case you cancel your life insurance policy within the grace period, i.e. 15 to 30 days, depending on your insurer, then insurance company will reimburse the premium amount paid by you. But, no refunds will be paid to you if the policy is cancelled after the grace period.

Yes, you can take life insurance under Married Women’s Property (MWP) Act, 1984 only if you are a married man and a resident of India. Buying a life insurance plan under MWP Act would be helpful in saving your family’s financial well-being when you are not around. As per this policy, only wife and children would be eligible to receive the death benefits. You can also buy a policy if you are a widower or a divorcee. However, in that case, you can give your child’s name as your beneficiary. It is very simple to buy a life plan under MWP Act. All you need to do is to fill up an MWP addendum while purchasing an insurance policy.

Yes, there are different payment options for you to pay premiums. Here’re some of them

    1. Regular premium payment option – This premium payment option allows you to pay premiums equal to your policy term either monthly, quarterly, half yearly or annually.

    2. Single payment option – Through this premium payment option, you can pay the lump-sum amount in one single payment.

    3. Limited payment option -In this premium payment option, you can pay premiums for a specific period of time less than policy term either monthly, quarterly, half yearly or annually, but benefits of insurance can be enjoyed for a longer period of time.

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