The following is an attempt at simplifying the Insurance terms and products that currently exist in the market. I have reviewed the various Insurance products from a Retail buyers point of view and mentioned my personal views and learning’s. In my personal experience what I observed was that there is very limited knowledge about Insurance products amongst people in India and also that most of us buy a Whole Life Plan before a term Plan!! which is exactly opposite of what an ideal insurance planning should be.
Following are some of the general Insurance terms:
Sum assured – The minimum amount that will be paid in case of an eventuality.
Premium – The amount that the Insurance buyer pays to the Insurance company per year.
How an Insurance is supposed to help a family or dependents.
The main concept of buying a Insurance product is that the customer will pay a premium amount once in a year (or regular intervals in a year) and a Sum assured amount will be guaranteed to be given to the family in case of death of the person. The family should claim the Sum assured by providing the claim documents and deposit the Sum assured amount in a Bank fixed deposit with monthly interest payouts. This monthly payout should be equal to the monthly expenses of the family. So considering a monthly expense on the higher side of about Rs 50,000 in a city like Mumbai for a Spouse and Kid including the educations costs, the Sum assured should be around 60 Lakhs.
A Term Insurance Plan is the only instrument that provides such high amounts of Sum assured for low premium amounts but has no return value. Hence when a person begins with a Job and is earning a Salary which is benefitting the family, the first financial product to buy is a Term Plan.
Following are the types of Insurance products currently existing in the Indian market.
Term Plans: Term plans are Insurance plans that have the lowest premiums and the highest Sum assured values. A term plan that I bought in 2013 at the age of 38 costed about Rs 5000 for a Sum assured of 30 Lakhs. These plans do not provide any return on maturity. So the money spent on these plans, though is less and provides no returns, the Sum assured is the highest and hence is the only ideal Insurance product.
My Opinion on who should buy these plans and spend on them till when:
A person who has just begun with his job or has just started earning, i.e. the ideal time to buy Term Plans is at the beginning of one’s career. Especially when a family is dependent on this person’s income. Also because a person who has just started earning would have the least premium paying capacity from his income. So he should choose the maximum amount of sum assured that he can afford to pay the premium for, something like a 3000 to 5000 rupees per year. This should fetch him a Sum assured for roughly about 20 Lakhs to 30 Lakhs depending on the Insurance company. By the time a person reaches the age of 45 years of age he or she can choose to discontinue the term plan and invest in money back plans.
Whole Life Plans
This Insurance plan has a moderate to low Sum assured value and the premium is very high. The concept of these products is that the family/Nominee will get the Sum assured value only after the death of the Insured person. A amount might get paid to the Insured person during the maturity which would mostly be equal to the premiums paid by the person.
Down side: Imagine a situation where a person lives for 60 years and pays a premium of Rs 25000 annually for a sum assured of Rs 6 Lakhs. An amount of 6 Lakhs will get paid to the Insured person at the end of maturity period of about 25 years- which is actually equal to the premiums paid. However the interest part of the investment made by the Insured person will be paid after his age of 60 years and will benefit only the family. So such plans should be taken only after a person has taken care of his earlier financial needs of the family like a Fixed deposit to take care of expenses like marriage, buying a car for the family, home equipments, Childs higher education, Childs marriage and then he should think of gifting a Whole life plan so that the Child or nominee will get an amount after the death of the person.
Usually such products will at the most double the amount of premiums paid by the buyer, so this anyways happens in case of a 10 year Fixed deposit, hence Whole life plans should be bought after very careful reviews and guidance from known experts.
These plans are the most marketed by private insurance companies in India and fetch the least benefit to a customer.
Child Education Plans
Highest premium and very low Sum assured!!! The only guarantee such plans provide is to return the amount of premiums paid in a interval of about 4-5 years when the child reaches the age of 19+. There is no guarantee for any interest rate of return – not even a minimum interest of about 7% that a Post office KVP, NSC instrument would provide. The only benefit that a customer should choose while taking any such plans is the Premium waiver benefit which means the Insurance company will pay the premium in case of death of the person and the child will get all the planned payouts during his education.
Fixed Deposit Insurance Plans
These products have the lowest Sum assured and combine a Fixed deposit benefit. It is recommended to have some of these plans as eggs in different baskets or you can view them as diversification of investment instruments.
Personal Accident Insurance Plans
These plans have the lowest premium and highest Sum assured but only in case of a Accident that causes death or permanent disability. Oriental Insurance has a very detailed PA plan.
This is another Insurance product that I recommend along with a term plan that every working person should buy as it costs the least amount of premium.
An ideal suggestion by financial experts is that investments should not be mixed with Insurance.
So a ideal financial planning that a person who has just started with a Job and is earning member of the family is to create a MINIMUM MANDATORY PORTFOLIO by distributing the disposable income between a Term plan, a Personal Accident Plan, a Post office fixed deposit instrument if lower lock in periods are desired (Kisan Vikas Patra which has low lock in periods, National Savings certificate which has a minimum lock in for 5 years), a Govt Bank linked Public Provident Fund account- PPF instrument which has a max lock in period of 15 years but amounts can be withdrawn after 6 years based on how much your account had 2 years ago. The interest received on PPF is tax free!! As compared to a Bank Fixed Deposit which is not tax free.
Very good summary of 'must secure' options..
ReplyDeleteThank You !!!
ReplyDeletePls do forward to your network.