Are you adequately protected?

In the event of a persons death,there are two kinds of losses: one is the emotional loss and the second is the financial loss. Nobody can compensate for the emotional loss that a family endures. However,the financial loss can be mitigated by buying the right kind of insurance, says Mumbai-based certified financial planner Gaurav Mashruwala.

Why a term cover?

Today insurance is sold more like an investment product rather than as a pure risk-cover product. Agents selling insurance products push investment cum insurance plans that enable them to earn higher commissions,rather than term plans on which their earnings are lower. In their sales pitch,they highlight returns and tax benefits that buyers can avail of by purchasing an insurance plan; the risk cover aspect is hardly discussed.

Due to poor awareness,most insurance buyers base their purchase decision on the consideration of how much return they will earn. While endowment plans,money-back plans and unit-linked insurance plans Ulips serve the purpose of generating long-term returns,if a person wants to buy insurance only for risk cover,term plans are the best,and also the least expensive,option.

Buying insurance is a financial decision,so people should evaluate every practical issue and not get emotional while buying it. People feel that thinking about ones death for no particular reason is a morbid thing. They tend to get emotional and as a result mix investment with insurance. Most of us wont hesitate to pay hefty premiums to insure our vehicles but when it comes to our lives we tend to start thinking about the returns we would get at the end of the premium-paying term. This is a very wrong way of approaching risk cover, says certified financial planner Amar Pandit.

As for why a pure-risk cover is preferable to insurance-investment combo plans,Mashruwala says: Insurance is bought to secure the financial needs of a persons dependants in the event of a mishap. Therefore,buying any product that has an element of uncertainty regarding what the family would receive in the event of a catastrophe would beat the purpose of buying insurance. Term plans are without doubt the best option for insuring ones family.

How much insurance?

To decide on the amount of insurance that a person needs,Mashruwala has a formula: While buying insurance an individual should take his expenses into consideration. These can be categorised under three heads: a one-time immediate payment,for example,to pay for a house or a ceremony a daughters marriage,a one-time long-term cost education loan for a child,and day-to-day recurring expenses. The sum of these three expenses minus the investments fixed deposits,mutual funds and so on is the amount of sum assured that a person should have.

Another factor that should be taken into account while deciding how much insurance to buy is the familys financial situation. The amount of insurance that an individual needs is inversely related to his financial stability. If a person belongs to a well-to-do family,the impact of his demise will not be too severe on the financial situation of his near ones,whereas in case of a family whose financial situation is not sound it would be a devastating blow. Therefore,a rich person might not even need insurance or need less of it,while a poor person with many dependants would definitely need it, says Mashruwala. Finally,one factor to consider is the worth of human capital. The tenure that a person can earn for and the amount of money that he can earn during his working life should also be considered while buying insurance, he adds.

Points to remember

While buying a term plan a person should always follow the rule that the premium-payment term should not be less than the term of the policy. Thus,a person should not buy a term plan by paying a one-time lump sum premium,but should make yearly premium payments. The reason for this is as follows: imagine that the annual premium for a term cover is Rs 3,000 and the policy has a 10-year tenure. In the normal course,the insured would pay a premium of Rs 30,000. Now,even if the insurance company offers an equivalent single-premium policy at only Rs 25,000,opt for the regular premium option. Here is why: in case of an unfortunate event after,say,three years and a total premium payment of Rs 9000,the regular premium policyholder would get the same sum assured as someone who had paid Rs 25,000 in the single-premium option. So why pay in advance?

Elaborating further on the strategy one should adopt while buying insurance,Pandit says that many people buy two-three policies thinking that they will discontinue one or two in future if they feel like doing so. However,that may not be the right approach. For example,a person with a Rs 1 crore cover split between two policies for a tenure of 20 years might think of discontinuing one policy after paying the premium for 10 years. In that case,he would be left with a cover of Rs 50 lakh. Due to this,in the event of his death the depreciation in the value of money due to inflation might leave his family underinsured. So it is better to keep just one policy and pay the premium on time so that it does not lapse. It is also important to buy the policy from an agent with a good track record. Remember that the agent is the first point of contact for the family in the event of a claim, says Pandit.

In todays world,like Humpty Dumpty,all of us are sitting on a wall of risks. It is important that we buy a good protective cover to prevent our families from destitution in case of an untimely tumble.

swarup.chakraborty expressindia.com