Things to consider when buying insurance

From being a happy-go-lucky & shy person, real life challenges hit you when you start working. You need to think about how to save money and decide which classes to invest in to achieve your financial goals. You also start to wonder how you can protect yourself & your dependents from life’s uncertainties. Insurance planning becomes very important at this stage of life.

If you are a caregiver, then the decision to take out life insurance and health insurance is not too late. But the million dollar question is where do you find more information about the benefits and eligibility of multiple insurance policies? There is a huge army of self-proclaimed consultants out there waiting to use you.

Let’s try to demystify these insurance products.

Life insurance

Life insurance is a contract between the policyholder and a life insurance company that pays a guaranteed amount on death or maturity. The idea is that dependents can use the premiums to manage various expenses in order to live a normal life. What type of life cover should a person take out to cover the expenses of their dependents? A basic rule of thumb is that every person should have life insurance that is equal to 15 times their annual income. How did this money come about? If a person has an annual salary of Rs 10 lakhs, then he should have a life insurance policy (Sum Assured) of Rs 1.5 crores. On his death, the family can keep the money in fixed income (FD) at 6 % interest, which is the prevailing rate, and get Rs 9 lakhs as interest.

Once life insurance is chosen, the next question will be about the type of insurance plan you should buy. Sponsors who may be acquaintances or the relationship manager of your neighborhood bank will push policies that will increase wealth with death benefits. The higher the number, the higher the performance and the better chance the winner will have at the million dollar round table (MDRT)!

You should buy a life insurance policy that only has a death benefit. These plans are called term plans and are very affordable in terms of premiums. For example, for a 25-year-old person, the annual premium of Rs 1 crore for a 25-year-old would be around Rs 8,000 per year.

All other policies are a waste of money. Time.

Mis-selling is rampant in the industry and you need to protect yourself from these enemies. They create fear in your mind & prevent tax benefits among others. If you are in a new tax bracket, the tax benefit loses all its features. Also, go for a short term, say 25 to 30 years, instead of taking a whole life or 80 year cover as the wealth and income you would have generated will take care of your dependents. The need for life insurance is reduced once a person crosses the age of fifty.

Health insurance

Health insurance offers reimbursement of hospital expenses (losses) when you are hospitalized. Post-Covid society has realized the need and importance of health insurance. If your company offers group health insurance you can rest easy. But if you are self-employed, it is wise to buy health insurance at a young age as the premiums are low. It is better to go for co-pay & deductibles of 5 to 10% to reduce the cost. And finally, always read the fine print during the waiting period under the procedure: whether it is another disease or a pre-existing disease. A floating policy can be better than individual policies as you can save on premiums while getting more benefits.

Car insurance

With roads that are choked with all kinds of traffic the chances are that your car could break down. And the maintenance cost is high. Payment is based on the value of the vehicle (declared cost of Insurance), no claim bonus, gender, address etc. To make car insurance affordable & to increase its market penetration, 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 floating policies for the cars they own. The same person who should help reduce the need for car insurance.

Finally, in the animal world, knowing these things can help you make informed decisions.

(The author is a CFA, ex-banker and currently teaches at BFSI’s Manipal Academy, Bengaluru)