Choosing the right kind of insurance cover not only determines the care that we receive should our health take a wrong turn, but it can be the wild card in your financial plan. There are many benefits of an insurance cover; however, topping the list of benefits is the financial support that a family gets in the event of the untimely death of the income provider. As getting the insurance cover is an important aspect of a sound financial future, choosing the right insurance cover is equally important.
With the increasingly uncertain times, what with terrorist attacks and tumultuous financial markets, getting an insurance cover for you and your family has become imperative. However, many of us do not take decisions because of it being such a big ball of wax.
Choosing the right kind of insurance cover not only determines the care that we receive should our health take a wrong turn, but it can be the wild card in your financial plan. There are many benefits of an insurance cover; however, topping the list of benefits is the financial support that a family gets in the event of the untimely death of the income provider. As getting the insurance cover is an important aspect of a sound financial future, choosing the right insurance cover is equally important.
First and foremost, choosing an insurance policy must be based on your current and projected income or simply put your current and projected ability to pay the insurance premiums, your medical state, your age, future financial plans etc.
Secondly, you also need to look at:
Cost-Benefit Ratio
The cost of the insurance cover depends upon many reasons, some mentioned above and other factors depending on what is covered in the cover or its riders. Thus, you have to keep a close eye on the cost of buying insurance and ensure that it justifies the benefits covered under the policy. Simply put, a right balance must be struck between the cost and benefits available.
Cover
You need to ensure that the insurance covers all your dependants and that it also covers the majority of health problems.
Thirdly, the promises made by different insurance companies are all fine; however, it depends on you whether you need a pure insurance cover or you need an insurance cover coupled with an investment opportunity. The four major kinds of insurances that most people opt from are:
- Term Insurance – Term life insurance or term assurance is life insurance which provides coverage for a limited period of time
- Endowment Policy– An endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its ‘maturity’) or on earlier death.
- ULIPs – Unit Linked Insurance Plan (ULIP) provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time.
- Money-back Policy – Unlike ordinary endowment insurance plans where the survival benefits are payable only at the end of the endowment period, money back policies provide for periodic payments of partial survival benefits during the term of the policy
When comparing between these plans it is important that you keep in mind the factors that were talked about in the first point. Let’s take a look at an example:
Arun is a 25 year old businessman who wishes to take an insurance cover for Rs. 20 lakh for a period of 20 years. There are two options he can choose from.
- Option 1 – He can opt for an endowment/money-back policy and pay a premium of Rs 90,000 annually. If he survives through the policy term, he shall be eligible to receive the entire sum assured and vested bonuses, if the same are declared by the insurance company.
- Option 2 – He pays Rs 4,000 annually and enjoys the risk cover of Rs 20 lakh. Being a term insurance cover, he is not eligible to gain any survival benefit from the insurance company and the insurance premium paid can thus be treated as the cost of covering his life for 20 years.
Whereas under Option 1, he has earned an annualized return of about 6%; Option 2 gives him about 9% returns during the period. Therefore, it is important for Arun to decide what he wants and opt for a plan accordingly.
It’s important to correctly identify your dependants’ financial needs to establish just how much life insurance cover to arrange. A general rule is to choose a policy providing at least ten times your salary, but more may be appropriate, with the amount varying depending on how you intend it to be used. Basically you decide how much you want your dependants to receive in the event of your death, and your premiums will be determined accordingly. Hence, make sure you keep all these factors in mind, compare different plans and choose your cover accordingly.
Hello, can you please post some more information on this topic? I would like to read more.
in my view it is better for Arun to choose II option, where after paying 4,000 p.a. for term insurance he can save the remaining 86,000 in long term equity mutual funds in SIP method so that he can earn more than 6% compare to take an endowment or money back policy.
Absolutely agree!
Hi.
hmm… I too was thinking just that. So the general advise is when you want to insure your life (which is important) then just do that. And when you want to make money, just do that.
Hi,
I don't understand how the rate of 6% and 9% against option 1 and option 2 respectively have been worked out.would appreciate your general help on this.
Hi,
The 6% comes from the annual amount the insurance company adds to what you pay. That varies from plan to plan and mostly it would sum up to 6% of what you pay. So if you are paying 90000 PA, 6% of that amount would be 5400 would be added every year to premium amount you are paying.
Coming to the second option, you would not avail amount after the term period. You will only benifit if you expire (Ofcourse your successors would be benifited LOL).
I think it's not sufficient information to opt for a right policy. If you can elaborate these kind of useful things, that would be better for reader to opt and help while chossing a new policy.
Please suggest me, i am an MBA Professional working for ITES industry having package of 2 L P.A, i opted for money back LIC policy in Nov last year, half year premium i need to pay around Rs.6000/-. I paid 1st installment in Nov-10. Please suggest me for one more policy, i may get married by last quarter of 2011 or in 2012. i can pay around Rs.2000/- per month apart from my existing policy, i feel. Please suggest me which policy i need to take and my option of money back policy is fine or not? it is 15years policy, i will recieve Rs. 40000/- for every 5years. at the end i will recieve around Rs.200000/-. My annual income may increase anyway i may plan to move to another company.
Please suggest me .
Vijay
Dear Sir,
Can you please provide me some more information regarding a policy, which I have not paid the full amount for last one year. Can i withdraw the policy, if so what will be my return on a mutual fund policy.
I have a 25 Lakh Jeevan Anand Policy taken in 2006 for which I am paying a premium of Rs. 1,33,000.00 per year. My agent said that would be enough to cover the entire tax limit of Rs. 1.0 Lakh. I am 42 years old. How do I return the same and take a new term policy for Rs. 25 Lakhs and how much of my premium will I lose ?
It is not just endowment & term assurance, there r many more multicombination policies by LIC
With little effort and search, we can manage and optimize Insurance Coverage and Cost-Benefit Ratio:-
Insurance Coverage:
1. Check what is your liability for your family. Your kids higher education, marriage cost, any loan your family have, flat or house rent, any major expected cost etc.
2. Then check how much your salary, how much your savings. What is the current plan to handle all above expanses under the current savings?
3. Then think how much insurance coverage you need to meet all the above liabilities in your absence.
Best way to manage Cost-Benefit Ratio (No profit No loss):
Under this take two types of insurance plans- 1. term life insurance, 2. with-profit plan. Adjust the sum assured in such a way that the all the premium for both types of plans could be recovered from the maturity amount of with-profit plan. In this way, its a no profit no loss combination.
Sir.I am a retired Bank Officer, comleting 63 years age on 18th oct.2012. I want to save only for the purpose of tax saving & income, life coverage risk is secondary. My PPF a/c is going to mature shortly with maximum term of 25 years. I donot want to block the funds for 15 years in new PPF a/c. Pl suggest some insurance plan &/or other avenue suitable to my requirements.