Insurance-Protect your Loved ones and Your Assets
SECTION I : LIFE INSURANCE
Compared to investment, few people appreciate the importance of insurance as part of their financial planning. The issue is how does one make sure the family doesn’t have to vacate the house after one’s death, the son need not drop out of college to support the family, daughter does not have to forget her plans to study abroad – if something happens to you. All these thoughts are worrisome. Then, why not pay a small premium and get a life cover. At least it assures sound sleep. Also remember that the earlier you insure yourself, the smaller will be the premium you will pay throughout your life. And that is not the end of the episode. We should review our situation periodically to assure that we are adequately covered.
Why do we need life insurance?
The money from a life insurance policy is useful in replacing the income that will be lost on your death. This will protect the standard of living of dependents like wife and young children. Another use of life insurance can be to earmark life insurance policies for life goals like children’s education and retirement.
How much cover should I take?
The money you get from the insurance company goes to three places: the immediate needs of your family, liabilities you have postponed for a future date and the benefits you enjoy thanks to your career. In short, at least financially, your family should not face a major upheaval in their lives in case you are gone. As per the insurance industry standards, one should be insured for an amount equal to 7 – 10 times your annual salary – however, this is a general figure. Your actual requirement will also take into account the liabilities in terms of loans etc that you may have taken on.
Term, endowment, money back…. those terms! What are they?
Insurance plans fall into three categories: term, savings, and whole-life:-
Term life insurance, simply put, is pure risk cover and the cheapest. You pay the premium and forget about it. Only your dependants will get an amount equal to your cover if you die prematurely. Savings products (endowment, money-back, unit-linked etc) are the most popular insurance products in India for the returns they offer. They are costlier than term products because the premium is total of both insurance cover and savings part. The insurance company will invest the savings portion and give you returns in the form of bonus or periodic paybacks. If you outlive the policy term, you will get the insurance cover and bonus. Your dependants will get the insured amount and bonus accrued. Whole life plans are not popular for the simple reason that you pay premium well into your retirement and you don’t see a penny coming from it as long as you are alive. It is cheaper, bonus rates are higher, and serves those who believe in insurance for insurance’s sake axiom.
What is a rider?
Today, many private insurers give you a basic plan and offer features, called Riders, which you can keep adding after paying a small fee depending on what you feel you need. The purpose is to customise or personalise insurance policies. A few riders of relevance to us:-
- Accident cover : This assures compensation if you become disabled in an accident.
- Double the sum assured : If you die during the policy term, you will get two times your cover.
- Waiver of premium : if you are disabled due to injury or sickness, the insurance company would waive all further premiums till you are able again.
Insurance Mistakes to Avoid
Don’t combine insurance with investment There is a temptation to buy products which combine insurance with investment. The problem is that such products often do a poor job on both fronts. The better approach is to separate your insurance and investment products.
Don’t depend too much on your insurance agent When buying insurance you should always remember that the incentives and aims of insurance agents might not coincide with your own.
Don’t confuse insurance with tax planning The amount of insurance you buy should be determined by the risks you face, and not the limits prescribed in the tax code.
Don’t forget to revisit your insurance needs As you grow financially in life, so will your insurance needs. For instance, for every child you have, you need to increase your life cover. Conversely, as you grow older and your retirement fund accumulates, your need for insurance decreases.
Don’t forget disability insurance Life insurance provides your family with funds in case you pass away but doesn’t apply if you are disabled and unable to work. So make sure you buy adequate disability cover.
Don’t over-insure small risks The question you should be asking is: is this a risk that will change my life fundamentally if the worse happens or will it just cause a temporary financial loss?
Buy life insurance for a spouse or children only if needed In a dual-income household, it is important to protect the earning capacity of both spouses. But your small, non-earning children will not pass the criteria for being insured.
SECTION II : HOME INSURANCE
Following can be counted as the most compelling reasons to go in for home insurance:-
Policy covers a range of segments. Home insurance covers almost all kinds of catastrophic risks, natural or man-made calamity, from damages arising from terrorist attacks to breakdowns of water tanks. Simple to buy. It is simple and easy to buy home insurance. You can buy it online as well.
Breakdown of domestic appliances. Home insurance covers the breakdown of ACs, and refrigerators. If there is accidental electrical or mechanical failure of domestic appliances, losses that can be repaired will be settled by repaying repair cost without applying any depreciation by the insurance company.
Cost of premium is small. The cost of the insurance premium in comparison with the value and cost of the structure and contents, domestic and electronic appliances, is less than one per cent. Most people don’t know that the premium to be paid is considerably small for the value insured. See the table below:-
|Must-have covers Fire and allied perils||COVER (Rs)||REMIUM (Rs)|
|Contents (excluding cash and jewellery)||5,00,000||250|
|Burglary, house-breaking, including theft||5,00,000||1,200|
|You’ll pay (after 15% discount on premium*)||2,507.50|
|All Risk (cash and jewellery)||50,000||500|
|You’ll pay (after 20% discount on premium *)||4,600.00|
*due to clubbing six or more sections
SECTION III : TAKING A SMART VEHICLE INSURANCE
Almost everybody who has a vehicle takes a vehicle insurance cover. A clean driving record and avoidance of frivolous claims really help you slash your motor insurance premium. With a decent record on that count, you could easily transfer upto 50% of your no-claims bonus to a new car purchase. There are a couple of other tricks like getting an AAI membership (actually a simple affair) and installing an ARA-approved security lock (almost everybody does it anyway), that knock off no-insubstantial amounts.
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