Insurance 101: Why, when, how?

InsuranceHave you ever pondered about inane things like, ‘Are there more red or blue umbrellas in the world?’ or ‘how many people forgot to carry one today or haven’t found the need to buy one at all?’ If you have, you’ll know that sometimes the silliest thoughts can lead you to think of the more important questions. Think about it further and you’d discover that ‘umbrella’ has been a metaphor for Insurance for years now.

Protection, tax-saving, investment – insurance can mean different things to different people. And then again for some, it can mean nothing at all! Did you know that there are more mobile phone users than insurance policy holders in India? In 2014-15 alone, there were over 25 million new life insurance policies sold, versus 50 million new mobile subscribers in the country!

Why Insurance?

An uncomfortable topic for some, insurance is often ignored because it is associated with mortality. People would rather do laundry than talk insurance! But with new milestones in life, it becomes imperative to review one’s financial standing. Insurance is the most effective way to mitigate financial risks in the face of adversity. From paying off current debts to covering future expenses, insurance can take care of the family’s finances in times of loss.

What to buy?

There are endless kinds of insurance policies in the world today. But here are 4 basic kinds of insurance for individuals.

Life insurance – The most widely used, life insurance provides coverage against a person’s death. The nominee of the policy holder is paid the sum assured either in whole or in installments. Life insurance is a fundamental requirement for an individual who has a family that depends on his/her income.

Vehicle insurance – Covers damage to the vehicle and its passengers, third parties who’ve been harmed from the said vehicle and related expenditure. While this insurance comes with every new vehicle purchased it makes sense to renew the policy, every year, as long as you own or drive the vehicle.

Property insurance – This insurance covers property against fire, theft or damage from natural causes. Whether you have a loan against your property, have valuable things in the house or living in an at-risk neighbourhood, property insurance covers you in the face of all calamities.

Health insurance / Medical cover – From preventive care to hospitalization related expenses, you can get coverage in time of crisis. Certain insurance companies cover out-patient care as well as dental. Though many corporate companies provide health cover for their employees through a group insurance policy, it is recommended that you get an individual policy as well.

When to buy?

The best time to buy insurance is before you will need it! Most financial advisors recommend that you buy life insurance when you reach 30 and medical insurance while you are in your 20’s. A good tax break aside, buying insurance early on will ensure you pay cheaper monthly premiums, over time. Also, it is easier to qualify for insurance when young, than later when health status and risks change. But most importantly, insurance needs have to be charted according to one’s phase in life. Whether it’s a significant rise in monthly income or getting married or having a child, insurance needs have to be upgraded accordingly.

How much insurance do I need?

Each individual’s insurance needs are based on various factors – income, debt, lifestyle, health, dependents and risk profile. When it comes to life insurance, most financial advisors say that the thumb rule is 10 -12 times of your annual earnings. Another view holds that the sum insured should be investment enough to be an income replacement. Aside insurance agents, there are several online tools today, to help you arrive at the amount of coverage required.

Insurance is a subject matter for solicitation – What does that mean?

You may have heard or read this disclaimer in insurance ads. While the insurance company offers and advises on what policy to buy, with the disclaimer the onus of choosing the policy falls on the policy holder.

So what next?

  • Educate yourself: Before buying a policy, compare several options. Speak to other people who’ve bought similar policies.
  • Read the fine print – Don’t be put off by the long winding legalese document. Ask questions and thoroughly understand terms of the policy and renewal before you sign up.
  • Don’t believe everything – Although the role of agents is to provide impartial advice, don’t forget that they work for commission. Do your own due diligence
  • Claims and settlement – Buy a policy from an insurance company that has a high rate of claim settlement. Also check customer complaint forums to understand better.
  • Review – It is recommended that you review your policy periodically to ensure that it takes care of your present requirements. Insurance portability is also an option these days.
  • Expenditure – Don’t be lured by policies that promise low premiums. It’s important to choose a policy that will give you maximum coverage, including various important aspects. For example: In the case of hospitalization, if the medical insurance policy worth 3 lacs (with Rs. 5000 premium p.a) does not cover key expenses like ambulance, x-rays, daily allowances etc. you are getting lesser coverage than required.

Find out about insurance policies that are in line with your needs and resources and get a solid financial footing in your life.