Insurance

Insure meaning arrange for compensation in the event of damage to or loss of (property), or injury to or the death of (someone), in exchange for etc.

Insurance essentially helps as a buffer in testing times in case of loss of property or life. Any individual should realize why & how much insurance is required basis his earning capacity and forecasted expenses. One should not just do insurance just for the sake of it.

It is a common myth that insurance is an investment product, whereas it is merely a cover to see through the expenses of the family during intricate times.

Now to extrapolate the myth further all the Insurance companies came out with swanky products like:

• Endowment Plan – A plan in which one has to pay regular premiums and if the person survives the term of the insurance, he is entitled to get the money returned with some interest. There is one benefit this plan offers is that the proceeds are entirely tax free in the hands of the customer. The caveat is the returns are only 6-7% per annum, which if adjusted against inflation give negative returns. The only benefit I see is that it brings along a certain discipline and makes you keep some money aside every year for your future.

• Cash Back Plan – This works similar to an endowment plan. But the premiums in this plan are more as compared to the endowment plan, as the money has to be returned to back to the insurer every 3rd year from the start of Life insurance. This might help in tax saving for a particular financial year and also can be planned for a future planned expense. One might get interested on hearing the cash back, but rest assured it’s the same money that the insurance company takes from you and will return it back in some years.

• Unit Linked Insurance Plan – Well the most treacherous of them all, this plan has the highest premium and has the highest annual expenses thus reducing the returns in the hands of the insurer. There are many synonyms of this product in the market viz: Insure + Invest, Investment Plan with Free Insurance or Insurance Plan with market linked returns, Investinsure, SIP-Insure and what not. Well in this plan the money is invested in a market linked instrument and the insurance company gives you returns as per the returns given by markets. I am yet to meet a person who has actually made money out of this.

• Child Plans – These are nothing but the same lollypop wrapped differently. This can be an endowment plan or a Unit linked plan based upon the needs of the insurer. These plans are primarily sold to new parents and try to play the emotional card. The returns are tax free in the hands of the insurer and can be planned as per the requirements of the child at various ages.

• Term Plan – This is the cheapest plan with minimum premium. There are no returns if the insurer survives the policy term. It only serves as the purpose to cover the risk in the inadvertent event of loss of life. It is also not intensely marketed / sold as the commission paid out to the agent is trifling.

All said and done each and every type of insurance  listed above also serves as an effective tool to save income tax U/S 80C, which facilitates one to save upto 20% of the premium paid in one financial year.

The insurance agent will try and pitch you to buy an insurance cover demonstrating some thumb rule of 7-10 times of annual income. Simply stated it means that one should have an insurance of upto 7-10 times of his/her annual income. Remember the ‘KILB’ gimmick played by Aegon Religare some time back. 

How much to insure solely depends upon the requirements and the standards maintained for living. There can never be one thumb rule for all the various kinds of people. Well for one, celebrities are famous for getting their individual body parts insured whereas a mango man might only get to get his life insured. 

Ever wondered how much insurance do the Ambani’s or the Tata’s or the Birla’s have got done for themselves. Do they follow the same thumb rule of 7-10 times of the annual income? Well they have so much cash flow already in place that they really don’t need any insurance.

So if a person has a business which is running well and is able to generate enough cash flow which can support his family for long, there seems no real need for the insurance. Buying insurance is an individual criteria, based upon one’s liabilities and not on some silly thumb rule!  Think!

A quick tip on how to calculate Personal Insurance. Make up a list of following things:

• Compute the total liability (including all loans)
• The total number of dependents (e.g. – family / parents / relatives etc.)
• Monthly expenses
• Big ticket foreseeable expenses; & 
• Adjust all this to expected inflation in the coming years

By doing this one will get to know how much insurance is required today. But in future with the changes in lifestyles and inflation one might need to re-consider the total insurance cover taken and may choose to increase/decrease the total cover. 

However one should not forget that the premiums go up with ageing, so it might be right to buy that higher cover now. 

Whether to buy or not to buy an insurance, is a personal call and totally depends upon an individual !