Sometimes, carefully made investment plans can be wiped out by a single stroke of fate. A sudden illness that robs a family of an earning member. A freak road accident that confines someone to a wheelchair for a while. When such acts of God hit you or your family, yes, your emergency savings can help. But rather than having your emergency fund fully cleaned out by catastrophic events, it is cheaper to buy insurance. In this video, Aarati Krishnan explains how you should select an insurance scheme.
Here are two types of insurance you need
Insurance is one of the most over-sold financial products in India. So right from the time you start working, you’ll discover that many of your neighbours, relatives, acquaintances and colleagues are insurance agents and are imploring you to sign up for one product or another. There are insurance plans available for everything from weddings to train trips.
You need to learn to ignore most of these pitches. Committing to too many insurance products at the beginning of your career can lock into you to rigid premium payments over many years. This reduces your ability to save or invest in other assets that can yield a much better return.
If you are young and have recently started out on your career, there are just two types of insurance policies you need.
Health cover: Health insurance pays your hospital bills in case of an illness or surgery requiring hospitalisation. You can take a standalone health policy to cover only yourself. Or you can take a floater policy which covers you and your parents or family members.
Pure term cover: Pure term life policies pay your nominee a lumpsum amount to make up for the loss of income, when the bread-winner or earning member of a family dies. You need a term life policy if your parents or family depend on you, even partially, for their living expenses. You also need a term life cover if you have loan obligations and woulnd’t like to burden others with them, in your absence.
You may not need a life insurance policy if you have no dependents or loan obligations and do not wish to leave a legacy for anyone. Remember, a life insurance policy pays your dependents money if you die – you don’t get to enjoy its benefits!
How much insurance?
It has become fashionable for agents to sell young people multi-crore life insurance policies and Rs 1 crore health policies, painting all kinds of scary scenarios. But for someone in their 20s, a Rs 10 lakh health cover and a Rs 1 crore life cover is usually enough. Most common illnesses and surgeries do not cost over Rs 10 lakh. Health complications that result in prolonged hospitalisation or complex surgeries such as organ transplants that can cost up to a crore, are a rare occurrence for folks in their 20s or 30s. You should also note that even cashless health policies rarely take care of your entire hospital bill, as most insurers only partly settle hospital claims. So having a Rs 1 crore policy does not automatically result in your entire expenses being reimbursed.
What to avoid
The earlier generation loved to invest in products that combined savings with insurance. These were the endowment and traditional plans from LIC and other insurers. But these are poor choices, which neither deliver good returns nor adequate protection. Traditional and endowment plans with fixed returns usually deliver low returns of 4-6% per annum. ULIPs invest your money in market instruments like shares or bonds. But they have a 5-year lock-in period and are less transparent and flexible than mutual funds.
Therefore, if you are being pitched insurance, stick only to pure term or health products and stay off