Insurance is for your family. It is a coverage for the risks in life.
And you don’t need the best parachute. A working parachute is enough.
Before I answer this question in detail, let me start with a few pointers that is relevant to understand. These pointers are:
- Often, we mix investments with insurance as most Agents selling insurance policies highlight the investment angle of the product.
- In the process of buying insurance, investment and tax planning together, we don’t get adequate insurance and can lose out on better investments and tax efficient products. It could be like travelling in 2-3 boats together, all of them going in different directions!!
- However,the combination of insurance, tax planning and investment can be a great product if it suits your profile and needs. The returns, apart from the insurance angle, is good enough if the tax saving is also taken into consideration.
- But if there is no tax savings, the returns falls down considerably but justifiably because it covers the risks of death too. Also, the bonuses have been decreasing as the return from short term policies are lower.
Now let’s answer the question, “What is Insurance?”:
Broadly,there are the following areas of insurance that we will discuss:
1. General Insurance: that covers for losses of car, homes, travel, etc
2. Life Insurance,
3. Health Insurance and
4. Pension, that covers the risk of living toolong
All non life insurance, and typically automobiles, homes, travel and Mediclaim policies are serviced by General Insurance Companies.
The market for general insurance products has become very competitive and online portals do a good job of comparing insurance quotes. Compared to life insurance products, they are simpler to evaluate.
In the good old days, Life insurance allowed individuals very few options and they were to opt for cover through two plans namely term and endowment plans. With competition to LIC, in the last decade, new products combining the investment angle with insurance became a popular choice too. It was called ULIPs.
However a good thing to happen in the insurance industry was the beginning of sale of online policies giving a huge cost advantage to the online buyers, besides giving them a hassle free service without going through an Agent. The distribution cost of approximately 40%-60% was passed on to the customer.
Let’s take a brief overview of the types of life insurance policies available:
· Provide only life cover
· Payout sum only if individual doesn’t survive the term
· Required to pay an annual premium for a predetermined tenure till you encounter an eventuality
· Long term and premium stays the same during the tenor
· Lower premiums
· Payout the sum assured under both scenarios – death and survival, as long as premiums have been paid regularly
· Good avenue for investment for those with low to medium risk appetite
· For investors seeking a combination of insurance and savings
· Downside is low and premium is higher
Whole Life Plans: A combination of Endowment Plan and Term insurance where the death benefit is paid only to the heirs of the policyholder.
· Invest in stock/debt market (you have the option to choose allocation)
· Combination of long term savings and insurance in that order; if objective is life cover,then term plan better than ULIP
· ULIPs have higher expenses; Pay out the sum assured on maturity
Let’s take an example of a 30 year old person taking out a policy of Rs 25 lakh for a 20 year period. This will give you a fair idea of the difference in the above types of Insurance.
Being young and healthy is no excuse for not buying Health Insurance. With the issues of:
· escalating pollution,
· healthcare that makes you live longer and
· Escalating cost of health care,
It makes sense that you get Health Insurance on priority.
When you are buying health insurance, here are the issues that you need to be aware of:
· Types of Health Insurance
· Costs,Duration of the cover, Location of services
Types of Health Insurance
You can start with asking your advisor about the difference between plans being sold by General Insurance companies and the Life Insurance companies. The General Insurance people sell Mediclaim policies where they reimburse the hospital expenses according to the policy you have bought. The Life Insurance people sell a health insurance plan where they cover hospitalization expenses while also providing some maturity/death benefits.
The Mediclaim sold by General Insurance companies can be either Individual or Family Floater.
The difference: Mediclaim policies issued by General Insurers are reimbursement policies while the Health Insurance plan issued by a Life Insurer combine health risk with savings. This means that if there is no health risk, you still get some maturity/death benefits which is not available in the Mediclaim policy.
However, the Mediclaim policies benefit from the large network of hospitals and TPAs (Third Party Administrators) which service your hospitalization needs more efficiently than the policies being serviced by the Life Insurers.
Costs,Duration & Location
For health insurance, we must look for the service that takes care of your needs rather than focus on the costs.
For example, let us compare two plans on the basis of duration of cover and costs. Let’s say you get a plan which covers you till age 65 and costs Rs 10000 annually. While the other plan costs Rs 15000 and assures lifelong cover.We would recommend the costlier plan as the need of Mediclaim grows with age and it’s a good idea to get life long cover.
Similarly, you need to assess whether the health insurance provider has an empaneled hospital/TPA in your area. There’s no point buying cheap health insurance which does not service your locality.
In health insurance, cheap is no good.
Pension: Covering the risk of living too long
With improving life expectancy comes the risk of living too long. You may have made financial arrangements for life up-to 80 but you may live till 90.
In India, if you have a Government job, you are lucky to have the best pension arrangements for your retirement. Even in the Government, if you have joined the job after 2004, you have been registered with the new NPS (National Pension Scheme) that will accumulate your annuity funds according to your contribution to the fund and the pension is no longer a pre-defined benefit.
Let’s start by understanding that Pension plans can be on defined benefitor on defined contribution.
In the defined benefit plan, the pension is paid irrespective of the contribution made by the employee and depends on the wage and inflation. This pension scheme is funded by the Government and is becoming a huge burden for the exchequer.
In the defined contribution pension plan, the employee contributes to accumulating the fund for annuity payment and bears the investment risk too. There is no promise by the employer about the benefits and it depends on the markets, not on wages and inflation.
Do you have any questions for us? Please share your own thoughts, feedback and comments with us.