JOIN USOne has to identify the right financial solutions to consider based on his/her requirements.
As a first step, you need to identify your requirement for money and when you would need the money, i.e. why, how much and by when. Next, you would need to assess your situation, either the required money is not readily available with you and needs to be accumulated or you have enough money and you need to invest/distribute it based on when you need the money.
Besides these, you would know whether you require the money within 1-5 years (short-term), 5-10 years (medium-term) or after 10 years (long-term). There are different financial solutions that will help you achieve your goals in the short, medium or long-term. Choose the solution accordingly, so that it will fulfil your purpose. Choosing a short-term solution to satisfy a long-term requirement, or a long-term solution to satisfy a short-term requirement will not help you achieve what you desire, and will result in you being unhappy with your choice.
That said, no matter your time frame of requirement, always consider a Life Insurance Term Plan. This is a plan that pays out a specific amount of money on the event of the unfortunate death of the person holding the plan and does not provide any investment-related returns. The amount of life insurance has to be chosen as your expected earnings during your lifetime. By doing so, you always ensure that even in your absence, the family would get the income that would have been earned by you, in your lifetime.
Once you have identified your time frame, and understand the type of solutions available, you would need to assess your willingness to take a chance. All life insurance plans do not offer a guaranteed return, some of them invest your money in a way that there is a possibility of high returns, but then also a possibility of very low returns. You will need to decide your ability to take such chances with your money.
We often confuse the ability to take chances, with our personal knowledge of financial solutions and markets, among others. You need to understand your own attitude towards money. You can ask yourself, what makes you anxious about money? What makes you feel secure about your money? Are you ok knowing that there is a small possibility you may end up with lesser money than you initially invested?
Finally, once you have understood your ability to take chances, or as they say ‘risk appetite’ you will need to understand that returns are relative. A 5% return could be high, if you had expected a 3-4% return. Likewise, a 10% return could seem low, if you were expecting a 20% return. Thus always compare the returns offered by the chosen financial solution basis the reason why you were choosing it.
If you were choosing it to find a safe option, then you can’t expect a 10-15% return, and so on.
While this is an overview of how you can evaluate life insurance plans, it is advisable for you to consult your financial agent or a life insurance company. They will be able to facilitate selection of a customised life insurance plan as per your individual requirement.
(The author is MD and CEO of IndiaFirst Life Insurance)