Thursday, September 4, 2014
How much insurance and what kind of plans should you buy
Thu, 04 Sep 2014 23:56:43 -0600
Have serious doubts in your mind if you get freebies or discounts in marketing of protection plans
Imagine getting into an evening party in oversize attire or even worse a dress that would have suited you 10 years back in size and style! I am sure the very thought would make you feel- it’s better to avoid that party.
Indeed, it’s amazing that we get so meticulous while it comes to dressing for an evening party of a couple of hours, but the same us get absolutely casual in measuring risk management and protection planning. A large number of insurance policies still get sold on compulsion with hardly any discussion on the issues of over- or under-insurance.
I often get this question, how much of coverage should be enough for anybody? Is it 10 times of annual expense? Or is it 5 times of income?
Some firms have managed to come up with highly sophisticated risk analysis tools, frankly sitting through such calculations calls for serious courage and conviction. I do not see many people getting into such sittings.
I would say risk management and requirement of coverage is a complex matter better left to experts and definitely calls a revisit every three to five years. It should be done with the exact precision and knowledge of that of a seasoned craftsman.
Having said that, I still feel there is enough room for some common risk planning to be done by anybody and everybody. I would group them into two -- MUST HAVE and GOOD TO HAVE.
MUST HAVE: The first thing to cover is obviously the routine liabilities -- house loan, car loan, personal loan etc. A simple pure term cover with a period to cover repayment term is a MUST for the full amount.
Make a simple calculation of your annual routine expenses – an amount equivalent to X times of that must be another term cover, (X is remaining period of employment/active earning period).
An accident cover equivalent to five times of annual income. Plus, a health Insurance cover suitable to the status/lifestyle of an individual.
GOOD TO HAVE: A critical illness cover equivalent to the base insurance amount. A savings-oriented plan for children’s education etc becomes a compulsive saving plus additional risk cover.
A retirement plan to have at least 10 per cent to 25 per cent of income going towards pension-higher the age higher should be the contribution. (If you are ok with zero liquidity-NPS works best). Much battered Ulip offers some great scope to save, grow wealth and having additional life cover – if invested in a regular premium plan with long term.
When I hear many people saying, I have an insurance that was done at the time of first year of the job itself, I find it funny... almost akin to using the school dress for an office party.
Many offers of combo plans -- offering solutions from anything to everything are also commonplace now -- I would urge you purchase only what you understand --remember complicated things hide facts!
It’s like having in one dish-mix of all the varieties of Indian delicacies. Would you really enjoy an idli sambhar with a tandoori chicken?
Take simple products, take multiple plans in different time of year-no need to purchase because a scheme is ending-remember new models offer new features.
Having said that there is nothing like best product with the ultimate solution! Each product approved by the regulator Irda has its own merits. The question is does it have your needs covered?
What I wrote are some very basic thumb rules of protection, though like I said – for the most precious asset –that’s YOU -- the risk analysis should be tailor-made and done by a professional.
It’s not about how much is enough. It’s about when you get into a contingency -- the ENOUGH may look rather small. A saving in risk premium is not a great save. If done improperly, life does not give another chance.
Like you don’t swallow a medicine because that is the cheapest or your friends also swallow it, do not buy protection unless you are satisfied with the credentials of the professional planner.
A good doctor does not offer freebies or discount, have serious doubts in your mind if you see such things in marketing of protection. Remember it is our precious life and that has got immense value for each of our loved ones-so why go for a FREE SIZE?