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].