Recently, I spoke to a IIT friend who wanted some advice about insurance. He had purchased an insurance policy in 2007 with the below features:
- Sum assured for life insurance purpose = 10 lakh
- Annual Premium = 50,000 rupees
- Policy term = 21 years
- Money back amount of 21 lakh after paying the above premium for the policy term.
This was the only insurance policy he had even though he earned very well. I was surprised by the highly inadequate cover he had and how much risk exposure he had. If this is the situation of highly educated persons, then what about the common man? Is insurance required or is it just wasteful expenditure? Are you covered for the risk that you are carrying? Read on, to find out.
Insurance can sometimes seem counter-productive, especially if you’re paying premiums year after year and never making a claim.
Managed wisely, however, it can be a valuable partner in your long-term wealth creation plans, and guard against severe financial disadvantage if your circumstances change.
As with any investment, choosing the right level of insurance cover can be a balancing act. The more assets you accumulate the more you need to evaluate their worth and because that can change, it pays to regularly review your cover and tolerance for risk.
The family home is the largest investment most people make. Depending on your level of cover, home and contents insurance can fully repair or replace your house, as well as everything inside it, if damaged by fire, storms or theft.
Yet the IRDA (Insurance Regulatory Development Authority) of India estimates that more than one-third of India’s households are without home or contents protection. More worrying, 83 per cent of homeowners and renters are under-insured. Remember that any claim you make will be affected if you don’t properly value your assets or if you underestimate any risks.
Take the time to work out if you want to pay for total replacement insurance cover or ‘sum-insured cover’. Total replacement includes all costs to re-build your home to the standard it was, while sum-insured cover pays out a pre-determined amount.
Compulsory third party insurance (CPT) is mandatory for every motor vehicle registered in India. It covers personal injury claims made against you by other drivers, passengers, pedestrians, cyclists, motorcyclists and pillion passengers involved in an accident.
You may choose to add comprehensive cover if a car is your primary vehicle and its damage or loss would affect your ability to work or care for your family. However, a second vehicle may not warrant the same level of cover.
The same level of focus is required on your ability to earn an income. People frequently underestimate the disastrous effects on financial wellbeing should they become ill, suffer an injury or die unexpectedly.
According to a report by the IRDA (Insurance Regulatory Development Authority) of India, 95 per cent of Indian families have inadequate life insurance. Yet one in five of those uninsured families risk losing half or more of their income, if the death of a partner or a serious accident or illness, leaves them unable to work.
Life insurance, and death and disability insurance are optional, but many superannuation funds include both as a default, or offer them as add-ons. If you’re the sole breadwinner, this cover can help to pay off a mortgage or other debts.
You may wish to consider income protection insurance or trauma insurance, which provide monthly payments that help avoid drawing down on your investments or borrowing to cover living costs if you can’t work.
What about DIY?
Self-insurance is an option for some.
You may decide that putting money aside – a rainy day fund – will provide enough to replace a car or some household assets. But it takes a lot of discipline to save enough to cover larger expenditures such as a new home, medical costs or replacing your full salary.
Insurance policies vary in what they cover, so read them carefully and shop around. Remember that it’s as important to read the list of exclusions on any insurance policy, as it is to read what’s included.