Insurance… Need,Limits

So, here am back discussing the most talked about thing Insurance. Some body was asking about when Insurance is needed at all, how to access what is the ideal limit and hence this post.

The basic tenet of insurance is that both you and the insurance company bet on the happening or not happening of a particular event. Insurance is a business tool to safegaurd against events which MAY happen. This is primarily to cover your monetoray costs. For example if the sole bread winner of the family meets with accident, expires there should be a regular flow of funds to meet as if the breadwinner existed.

This should answer- is Insurance needed at all. Do not take insurance for emotional reasons – if you are high networth individual and you dont have financial dependents, you wouldnt be needing insurance in first place.

Under insurance is another malady we come across when endowment policies are sold in India. Note that in India insurance is sold while its brought in developed countries.

I remember my father was insured for 2000 INR ( yes it is two thousand rupees) in 1970 for a term of 20 years… This is a classical example of under insurance using an endowment policy ( money back). Had my father taken a term insurance, he would have got a much bigger coverage. Had something happened to my father, that 2000 is pittence as insurance and defeats the very purpose in first place.

Here are some guidelines

  • Insure every breadwinner to the EXTENT they contributed to monthly income for a period of atleast 10 years. Meaning if your spouse contributes 12,000 INR per month, the insurance should do so similarly with the lumpsum in some FD/debt instrument for a term of 10 years. Thumb rule is 20 times your annual income.
  • Allways take Term insurance, ignore endowment or money backs – they are only investment – ULIP is the same story.
  • Under Insurance is the bane of majority of people. Keep reviewing your needs regulary and upgrade/downgrade according to risks. For example people tend to ignore the loans etc – a classic product is insurance against home loan defaultment due to death of the loan taker.
  • There are some sundry things people take insurance cover like theft for home articles, loss of property/assets from earthquakes,fires including cancellations of ones marraige !!! [ This is the latest straw, you have spent 8 lakhs in advance for your marraige and due to beravement, it stands postponed – you loose all deposits paid to choultry to chowkidars…so here is the helping hand of insurance].
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7 Responses to Insurance… Need,Limits

  1. Ankur says:

    20 times of annual income is very high….
    the interest on that amount itself will exceed your present income….

  2. Veena says:

    and dont take insurances(moneback/endowment) with fat premiums.. u will end up run out paying the premiums…
    poor we, many a times we end up traking policies out of obligation(daakshiNya)

  3. Veena,
    Obviously thats the catch… we just take our earning capacity for granted and commit to many fat premiums, EMI’s….. Yes, the dakshinya part is also there.

    Ankur,
    No. Probably you are comparing the endowment premium rates which are sky high. Let me give an example. A person drawing 2 lakhs per annum aged 22 years will be charged 2600 per annum per lakh for a term insurance. So 20 x 2 = 40 lakhs he will need to pay 40 x 2600 which is approx 1,04,000 as premium per annum.

    But just look at what happens if he dies from a accident or has a heart attack, the 40 lakhs can be put in bank FD’s yielding 3,20,000 Per annum (@ 8%) just like his salary and replaces his earning capacity and post tax would equal the 2 lakhs he would have drawn otherwise.

    Obviously the 1.04 lakhs which is non returnable on survival is the biggest emotional block in mind due to which you land up with 50,000 or 2 lakhs insurance (mostly endowment )Think how at all that 2 lakhs is usefull on demise?? 16,000 per annum is no where near his 2 laksh per annum replacement!!

    The tail portion is, this cover becomes costly as one starts nearing old age and insurnace cover should reduce gradually for 2 reasons, theire investments would create wealth over time and by retirement allmost all their responsibilities – financially would have come to an end.

    Obviously that thumb rule can be relaxed to 15 times based on need basis. In case there are no financial dependents like spouse, kids or loans, he woudnt need the insurance in first place!

  4. Ankur says:

    @mohan….
    let me rephrase…..
    do u think someone in his right might pay >50% in insurance… most people.. including myself will find hard to save that much.. and u want me to buy insurance cover.. so that i live in poverty and die rich????

  5. Ankur,
    Agree with you that everybody may not be able to save that much and hence its called the thumb rule… Live in poverty and die rich… Good one. In fact if one doesnt care for after death, insurance question dosent araise. Overall its a individual need and personlised factor.

  6. bachodi says:

    Wonderful information sir, thanks for this.

  7. Rovena says:

    Yes sir i agree with you… insurance is an essential thing and life insurance is very much essential for all!

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