Insurance has come such a long way in India. Earlier, insurance seekers were also investors who would be awarded with a risk cover along with a saving and investment avenue.
Insurance has come such a long way in India. Earlier, insurance seekers were also investors who would be awarded with a risk cover along with a saving and investment avenue. Now, insurance and investment products have evolved with time to fit in with the economic environment. However, we Indians are wary of market risks and are still tempted to invest in traditional insurance plans. Stated below are six important insurance decisions that you should take in 2017:
1. Separate your insurance from investment:
The simple way to imply this is to detach your investment goals from your insurance goals. Let us take a simple example of a man, aged 35 having 2 children and a dependent spouse. His investment goals would be to provide for his children’s higher education and marriage, purchase a housing property for his family, and plan his retirement. This is different from his insurance goals which would be to protect his family, his home, his vehicle etc. from any emergencies. If you purchase a single financial product to achieve both your insurance and investment goals, then there is high probability that either one of them is not achieved.
To ease inflation pressure and to boost economic growth, the RBI over the last couple of years has cut the benchmark interest rates by 175 basis points (1.75%). This has reduced the returns from fixed income investments. Insurance companies, by offering guaranteed return products, lure the conservative investors. The investors don’t often realize that their return on investment for such products barely match the inflation rate. Investors purchasing such products would neither be able to meet his investment goals nor his insurance goals.
2. When buying life insurance, pick a term plan:
There are 3 basic ways to calculate your insurance requirement:
a) Income replacement method – In this technique one assumes that his / her present gross annual income for the no. of years left for retirement would be enough to meet ones family requirement in case of his / her sudden death
Income replacement method = Gross annual income * No. of years left for retirement
b) Human Life Value method – In this approach, one’s insurance needs will be met by the present value of all future income that the insured is expected to earn for his families benefit.
c) Need Analysis – As the name suggests, it is the present value of all future financial goals that you except to achieve for your family, example children’s education and marriage, providing for your dependent family members, repayment of outstanding loan amount etc.
However, be the method with today’s rate of inflation, lifestyle etc. one’s dependents may easily need a minimum risk cover of Rs. 1 crore to take care of long-term financial needs. To achieve this cover through traditional, endowment plans, you would have to pay a very high premium. So the best and the cheapest way to choose is by comparing online term plans. A 30-year-old earning Rs. 500,000 can buy a basic 30-year term insurance with annual premiums ranging between Rs. 7000 and Rs. 11,000.
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3. Do not go without health insurance:
Average hospitalisation costs grew around 10% year-on-year between 2004 and 2014 in India – at a rate much higher than the average cost inflation of 7% per annum. A single visit to the hospital has the capability to erode all your savings in one go.
If you are salaried, there is a high probability that you would be covered by your employer under the group insurance policy. However, with this spiraling rate of healthcare inflation and no job security, one has to have a top-up plan in place. A top-up plan provides additional coverage once you exhaust your existing cover. As these plans cushion your existing cover, they are cheaper in contrast to regular plans.
If you are a self employed professional or a businessman, then it’s absolutely important that you have health insurance for your whole family, either through individual policies or under a family floater plan to cover the whole family. Please note that a floater plan takes the age of the eldest member of the family to calculate the premium. Therefore, it is advisable to take a separate plan for your elderly parents.
4. Consider buying critical illnesses insurance
Thanks to high stress lifestyles, exposure to pollution, rich diets, and lack of exercise, critical illnesses are becoming prevalent. The long-term treatment of any critical illness can take several months or years, and this has the potential to drain any family’s savings. To protect your family against such risks, consider having a critical illness insurance plan that will provide you a lump sum upon the diagnosis of listed illness such as kidney failure, cancer, paralysis, coma, sclerosis, cancer etc. A separate plan can be taken for critical illness or it could be a rider on either a general health insurance cover or a life cover. This cover can give you a financial cushion making it easy for you to manage funds while dealing with a possibly difficult hospitalisation and treatment.
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5. Always have comprehensive insurance for your vehicle
Third party or liability insurance is compulsory on your vehicles. It covers the legal liability for the damage caused to a third party only; this would include bodily injury, death or incapacitation of the aggrieved. A third party would be anyone who is not the insurer or the insured. It could be a pedestrian, a passenger in your vehicle, or the driver of another vehicle. However, such an insurance plan will not cover damages caused to you. Hence it is important to have a comprehensive insurance plan where you get protection for your vehicle, self, and also against accidental fires, theft, or natural calamities.
6. Protect your home:
Natural calamities like earthquakes, cyclones and floods are on the rise, guided by the hand of human activity. A home insurance product can cover you from such threats. A typical home insurance plan covers damages by fire, and natural calamities, or man-made damages such as riots, terror attacks, strikes, etc. You also have the option of insuring the contents of your home by having a home contents cover.
(The writer is CEO, Bankbazaar.com)