People often mistake life insurance to be another investment option. While life insurance promises monetary gain in the long term and encourages policyholders to save over decades, its potential for financial returns is relatively low. Hence, one must approach life insurance differently from other investments.
Remember, a life insurance policy provides financial protection to your family in the event of your death. Life insurance can also serve as a financial planning tool. In both cases, comprehensive needs analysis is necessary before purchasing a policy.
What Is Needs Analysis?
Most insurer websites have a needs analysis calculator. You have to fill in your financial details – everything from your current income, your spouse's income and your family's future expenses to existing assets, mortgages and loans demand mention here. The needs analysis calculator evaluates this data to estimate your insurance requirements. An online calculator will give you a basic idea; an insurance agent can provide a more customized estimate.
Why Is Needs Analysis Necessary?
Life insurance entails extensive back calculation. You must first decide on the required final payout before choosing a suitable policy. Since insurance is all about risk coverage, the policyholder must prepare for his family's future needs. This is where needs analysis enters the picture. It makes one aware of present expenses and helps prepare for future contingencies. Most importantly, it helps ensure that the policyholder's death does not leave his/her family in the lurch.
Needs Analysis and Big Expenses
Many people underestimate the value of needs analysis. However, by skipping this step or not taking it seriously, you will not be doing your family any favours. If you are concerned enough to purchase life insurance, go the whole hog. Even without needs analysis, your family will receive the sum assured by the insurer. But will this be sufficient to take care of their future living expenses?
There is always the worry that your life insurance payout may not be enough twenty or thirty years down the line. Needs analysis cannot eliminate this problem, but it can help you prepare for it in a better way. If you are thinking about buying life insurance, needs analysis will help you account for the big expenses such that they do not become oppressive burdens on your family.
Some major expenses that needs analysis could help you prepare for are mentioned below:
1. Mortgages and Loans – In your absence, mortgages and other borrowings could become huge financial stresses for your family. Carry out needs analysis so that your insurance payout takes care of such costs.
2. College Fees – Needs analysis calculators take into account the number of children that you have as well as their ages, thereby helping you estimate their higher education fees. After all, every parent hopes that their kids can go to the best colleges, unencumbered by worries about cost.
3. Income for Your Family – Needs analysis can help you estimate your family's future living costs. It will take inflation into account as well as factors such as a working spouse and the likelihood of grown-up children who are also earning.
This is just a hint of the big costs that lie ahead. One can never really foresee the financial pressures that may arrive decades into the future. But with needs analysis preceding your insurance purchase, you can minimize the dangers of the same.
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal
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You may write to the author at Deepak@myinsuranceclub.com