Do you tend to confuse insurance with investment? Do you find it difficult to understand why these two are as different as chalk and cheese?
Well, you can't be blamed. Many of us travel in the same boat. This happens because you think investment (which is about maximising your returns) is undoubtedly more exciting than insurance (which is about minimising your losses). That is as simple as it gets.
But if you think that you can continue with this confusion forever, then it's better that you take a deep breath and look again at both these aspects.
If you ignore the latter (insurance), a serious setback may erase all the gains you make from the former (investments). Therefore, picking the right mix of insurance is an important part of financial planning.
In broad terms, insurance is about exchanging an unlikely but very serious loss for a series of small but certain losses.
For example, when you buy health insurance you have to pay a regular premium (a small but certain loss). In return, you avoid the problem of massive hospital expenses if you fall seriously ill (an unlikely but very serious loss).
Insurance planning is about identifying the big risks in your life and buying protection from them. Here are some general tips:
1. Don't mix insurance with investment
There are some products like ULIP's which combine insurance with investment. Such hybrid products will naturally cost more than insurance-only products for any given level of coverage. To understand this better, read 'Why ULIP is not the best insurance product'.
You could buy a pure insurance product, like a term insurance plan, and invest the savings (the premium that you pay for a term plan is very low compared to an ULIP premium) yourself; this would be much more flexible than buying the hybrid product.
The bottom line is that insurance and investment are different things and you are probably better off buying separate products.
2. Focus on the big risks
When you purchase insurance, think of the big risks that could seriously cripple your finances. This could be something like the death of the main earning member in your family or a medical emergency.
There are smaller risks too; these can sometimes be insured but may not be worth the cost.
3. Assess your insurance needs regularly
Your risk profile and insurance needs don't stay the same. As your life changes, so does the amount and type of insurance you need.
For example, when you have a child, you may need to increase your life cover. If your investment fund increases along with your age, then you may be able to reduce some kinds of insurance.
Once you are aware of when and why you need to insure yourself against unforeseen circumstances, you should go for only those protection/ insurance that will help you and your immediate family overcome an unfortunate event.
It is exactly for such purposes that insurance companies provide protection against a wide range of risks. Here are the main types of insurance for individuals and families.
Life insurance
Life insurance is perhaps the most important form of insurance for the average family. It will protect a family financially in case the main earning member passes away.
Life insurance will provide the family with a large sum of money which will earn them a steady income to replace the lost income. It also provides them with the liquidity (cash in hand) to meet financial obligations like medical expenses and housing loans.
The amount of insurance you should buy depends on a number of factors like the number and age of children and whether your spouse is working. If your family has substantial financial assets, then that may also reduce the need for life insurance.
Health insurance
Medical expenses are rising rapidly in India today and at the same time unhealthy, modern lifestyles are bringing on new kinds of diseases.
Health insurance helps pay for your medical expenses and reimburse your hospital bills up to the limits defined in your policy. It may also offer cashless facilities at select hospitals that allow you to receive treatment without making any payments.
A popular medical insurance plan is Mediclaim, offered by the four GIC subsidiaries, which allows you to buy coverage up to Rs 5 lakh. You can buy coverage for a year and renew it annually. To understand this better, read 'Mediclaim: What you need to know'.
Home insurance
For many families, a home is not just a place to live in but also their biggest asset. House insurance protects you from damage to your house from fire, theft, natural calamities etc.
You may also insure the belongings in your house, though this is worthwhile only for relatively expensive objects.
Disability insurance
Disability insurance protects you and your family if you suffer from a serious injury that prevents you from working. It can be purchased as a part of a life insurance policy or separately.
The decision on how much disability insurance to buy depends on the same kind of factors as life insurance.
Automobile insurance
After the home, the car may be the biggest asset for many families.
There are two kinds of auto insurance:
~ Form A is compulsory and covers liabilities to third parties in case you hurt another person or damage property while driving.
~ Form B is an optional policy where you can buy additional protection; for instance protecting against the loss or damage of your car because of theft, fire, floods, etc.
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