From being a happy-go-lucky & footloose person, the harsh realities of life hit you when you start working. You need to think of saving money & decide on which asset classes you should invest in to meet your financial goals. You also start wondering how to protect yourself & your dependents from the uncertainties in life. Insurance planning becomes crucial during this stage of life.
If you are the breadwinner, then the decision to take life insurance and health insurance brooks no delay. But the million-dollar question is where do you get information about the benefits & suitability of the many insurance products? There is a vast army of self-proclaimed advisors out there waiting to exploit you.
Let’s try to demystify these insurance products.
Life insurance is a contract between the policyholder & the life insurance company that pays a guaranteed amount in the event of death or on maturity. The rationale is that the dependents can use the claim amount to take care of various expenses to lead a normal life. What is the adequate life cover that an individual must take to compensate for the financial loss faced by his dependents? The rule of thumb is that every individual must have life insurance which is equal to 15 times his annual earnings. How is this amount arrived at? If an individual has annual earnings of Rs 10 lakhs, then he must have a life insurance cover (Sum Assured) of Rs 1.5 crores. On his death, the family can keep the claim amount in a fixed deposit (FD) at 6% interest, which is the prevailing rate, and get Rs 9 lakhs as interest.
Once the life insurance cover is decided, the next question would be about the type of insurance plans you should buy. The agents who could be your acquaintance or the relationship manager of your neighborhood bank will push for a policy that can create wealth while ensuring death benefits. The more the premium, the higher will be his commission and the brighter will be the chance to be a part of the million-dollar round table (MDRT)!
You should buy life insurance which has only death benefits. These policies are called term plans and are the cheapest in terms of premium paid. For example, for an individual aged 25 years, the annual premium for a term plan of Rs one crore with a tenure of 25 years could be around Rs 8,000 per year.
All other policies are a waste of money. Period.
Mis-selling is rampant in the industry and you should guard yourself against these predators. They create a fear in your minds & dangle tax benefits among others. If you are in the new tax regime, the tax benefits lose all their sheen. Also, go for a limited term, say 25 to 30 years, instead of taking life-long cover or up to an 80-year term since the physical & financial assets that you would have created will take care of your dependents. The need for life insurance reduces once the individual crosses fifty years of age.
Health insurance provides for reimbursement of medical expenses (financial loss) when you are hospitalised. Post-Covid people have realized the need for and the importance of health insurance. If your company provides group health insurance you can breathe easy. But if you are a self-employed individual, it is prudent to buy health insurance when you are young since the premium is low. It is better to go for a co-pay & deductibles of 5 to 10% to reduce the premium. And finally, always read the fine print on the waiting period under the policy: whether it is for certain diseases or for pre-existing diseases. A floater policy would be better than individual policies as you can save on premiums while getting additional benefits.
With roads getting choked with all sorts of vehicles chances are that your vehicle may get damaged too. And the cost of repairs is high. The premium depends on the value of the car (Insured’s declared value), no claim bonus, gender, address et cetera. To make motor insurance more affordable & to increase its penetration in the market, the Insurance Regulatory and Development Authority of India (IRDAI) has allowed insurers to introduce concepts like Pay as You Drive, Pay How You Drive, and floater policies for vehicles owned by the same individual which should help reduce the premium on motor insurance.
In the final analysis, in the predatory world, knowledge about these products would help you make rational decisions.
(The writer is a CFA, former banker and currently teaches at Manipal Academy of BFSI, Bengaluru)