Cover, Cover and What Insurance Cover?

Cover, Cover and What Insurance Cover?

Dear all,

The other day, on a sweltering afternoon, I was ambling through the crowded markets of Dadar West in Central Bombay, which offers all kinds of merchandise to people from all walks of life; irrespective of their income levels. You can buy just about anything from these bustling bazaars which offer a variety of products and services, right from provisions, fresh vegetables, fruits, meat/fish, jewellery, watches, eatables, photography, eateries, electrical goods, domestic appliances, furniture, to ready-made garments and so on. You can get some great bargains also here. The interesting thing about Dadar West market is that it is suitable for consumers with all kinds of budgets.

As I was jaywalking through the pavements, amidst jostling crowds, literally rubbing shoulders cheek-by-jowl with other shoppers, I found some plastic sheets in various hues strewn all over the sidewalk. Looking at them closely, I gathered that the sheets were covers for several gadgets, like, refrigerators, washing machines, television sets, mixers, grinders, etc. We Indians have a particular liking to cover each and every gadget, thing or appliance with a cover, be it plastic or cloth. We buy covers for our suitcases and for our mobile phone handsets, cars, two-wheelers, etc. Car owners, including those of C and D-segment cars, never remove the plastic covers from their seats in their cars, even two or three years after buying it! No doubt, living in a tropical country nearer to the Equator with the Sun beating down vertically, we need to protect our goods from heat and dust. May be, it is a curious case of Indians overdoing it. In some houses, I’ve have seen ladies protecting their Godrej wardrobes/almirahs too with covers!

But when it comes to basic covers that are very vital in our lives, we seem be utterly unaware of the consequences of not having those important covers. One typical case is the bravado exhibited by motorcyclists on our bumpy roads without wearing any crash helmet. And then there is this most vital cover, that is, insurance cover – insurance cover for the lives of earning members of the family. Of course, we don’t do any insurance for our household articles also, that’s a different issue altogether.

Here is an engaging conversation one had in a local train with a young man in his mid-30s:

HP: “Hi, Vishal, how’re you?”

Vishal: “Fine, and what about you and where are you coming from?’

“Fine, thank you, Vishal. I’m just coming from Nariman Point after attending a seminar on life insurance there.”

 “Okay, how was the seminar?”

“It was good. How is life and what about your folks?”

“Life is good and my family are also doing well.”

“Okay. By the way, how much insurance cover do you have?”

“(rolling his eyes) Mmm…I pay some thing like Rs 65,000 to Rs 70,000 for my insurance policies every year.”

“I’m not asking you about the insurance premium you’re paying, what I want to know is what is the total sum assured of your policies.”

“(after scratching his head for a few minutes…) I think I’ve got four polices – money back and ULIPs – and total sum assured is around Rs 3 lakh.”

“You’re paying a premium of Rs 70,000 for a total cover of Rs 3 lakh!”

“Yes, HP, that is right.”

“Vishal, do you think the amount of insurance, that is Rs 3 lakh, is enough for a man like you working for a good company in Bombay?”

“I’m getting good income tax deduction for the premia I pay every year and I get good sums regularly from my money-back policies.”

“It’s correct that you get IT deduction, but the total insurance cover may not be sufficient for your insurance needs.”

(silence for some time)

“As you’re working for a good company, I suppose your annual salary will be around Rs 4 lakh, right?”

“Yes, it comes to around Rs 4.5 lakh.”

“Your annual income is Rs 4.5 lakh, but your insurance cover is only Rs 3 lakh. Do you think it’s enough to protect your family members if anything happens to you?”

“(making some murmurings and feeling sweaty in local train where we’re packed like sardines, he finally admitted) I don’t know, you tell me how much insurance I need.”

“It depends on several factors – like your age, annual income, family obligations and needs, liabilities, dependent parents/siblings, future inflation, future needs, medical history, and others. But since your family obligations are limited and you don’t have big liabilities, I can tell you one thumb rule, Vishal.”

“What’s that?”

“In general, an earning member of a family requires a life insurance cover of about 10 to 12 times his/her annual income. This is only a ballpark amount. If one is having a house loan of, say Rs 15 lakhs, one’s insurance need will go up by that amount since he/she can’t afford to pass on their loan liability to other family members.”

“(shocked with disbelief) Ten to 12 times, that’s too much insurance!”

“Yes, it’s true. Why I tell 10 to 12 times is: Suppose a person with an annual income of Rs 5 lakh insures for, say, Rs 60 lakhs. If the person dies, the family will get that Rs 60 lakh sum assured from the insurance company and they can earn an annual interest of around Rs 4.80 lakh at an average of 8 per cent return. And that money will be sufficient for making a decent living for the surviving members of the family.”

“I can’t afford to pay so much amount of premium.”

“I think you can definitely afford it, provided you opt for the cheapest insurance policy.”

“What’s that?”

“It’s pure term insurance policy offered by several good insurance companies in India with the lowest premium. Pure term insurance policy is basically bought for protecting your loved ones.” 

“What would be the premium of that policy for my age?”

“For a 35-year old male with normal health, for a term insurance of Rs 60-lakh sum assured and for a term of 25 years, the annual premium will be around Rs 20,000 – the cheapest from an insurance company among more than 20 insurers in India. The most expensive one will be Rs 33,000 per annum from a big insurer.”

“(raising eyebrows with excitement) Is that only Rs 20,000? But, I’m paying Rs 70,000 premium for only Rs 3 lakh sum assured, why is that?”

“Because, there is lot of mis-selling. All  your policies are money-back and ULIPs and their premia are very high. Insurance agents usually sell policies that fetch them highest commissions. In case of ULIPs, agents get up to 40 per cent of the annual premium as commission in the first year itself. While buying, you ask your agent the amount of commission she gets from your policy.”

“(looking perplexed) Forty per cent commission, is it true?”

“Yes, it’s correct. You’ve to compare various life insurance companies’ policies before opting for a specific policy. Pure term insurance plans are the cheapest and recently their premium rates have come down substantially due to reduction in solvency margin by the insurance regulator.

“In fact, IRDA, the insurance regulator, has permitted the insurance companies to sell insurance policies online at lower premium and a few insurers have started selling term insurance policies online – with the premium being one of the lowest.”

“Is it really, can I buy term insurance policies online?”

“Yes, you can, of course. But, it’s always better to consult your certified financial advisor unless you are an expert on insurance matters. After that, you can take a decision depending on your individual needs and can buy that policy online.”

“By the way, what’s the return I get from this pure term insurance policy?”

“Nothing!”

“(utterly shocked) I don’t get any return?”

“No, you don’t get any return from the term insurance policy if you survive the policy term. It’s similar to your car insurance. You just pay and forget. Only if anything untoward happens to the insured, his/her family will get the full sum assured.”

“(shaking his head vertically and horizontally) Mmm…Why I should invest in this term insurance if I don’t get any return?”

“Good question, Vishal. Insurance is separate and investment is separate. Don’t club them together. As I told you earlier, for a total cover of Rs 60 lakhs, you pay a premium of only Rs 20,000 per annum.

“But, if you opt for an endowment, money-back or a whole-life policy or ULIPs, you’ve to pay something like, Rs 2 lakh to Rs 5 lakh premium annually, which is more than your annual income!”

“(shrugging off his shoulders) I need to get some returns on my investment, nah?”

“Basically, you need to keep insurance and investment separate. First, buy term insurance very cheaply and the remaining amount you can invest in high-yielding equity mutual funds which are likely to fetch you a return of up to 12 to 14 per cent over long-term.”

“Are returns from equity MFs guaranteed?”

“No, they’re not. Going by their track record in the last 15 years in India, I’m telling you this. But, if you are risk averse, you can still invest the amount in a PPF account or other safe/guranteed instrument, which may fetch you returns between 8 and 11 per cent depending on your tax bracket.”

“Okay, HP, can you tell me some good policy for my child.”

“You mean child insurance? Why does your child need insurance?”

“(not knowing what to answer) Huhhh…so many policies are being offered… I’ve seen several ads on billboards, TV and in newspapers.”

“Well, life insurance needs to be done on behalf of the breadwinner in the family – the insurance cover should be for the life of the breadwinner and not for the child. So that, if anything happens to the earning parent, the child get protected and receives the sum assured.”

“I will require money when my child goes for higher education.”

“I entirely agree with you, you need money for your child’s higher education. After taking adequate basic pure term insurance covering your life, as I told you about 10 to 12 times of your annual income; you can consider a child insurance plan provided your savings permit you to buy that child insurance plans.”

“There are some child plans available in the market that cover the life of the child.”

“Yes, there are. That doesn’t mean you buy them. The parent does not incur any financial loss, so it’s not necessary to take policies that cover the life of the child.”

“But, how do I ensure that I save some money for my child’s higher education or, say, marriage?”

“As I told you, first take pure term insurance covering your life; then you can opt for some money-back or endowment child insurance plans that protect the life of the earning parent, but not the child. Or, you can opt for a combination of pure term insurance and equity mutual funds with long-term regular investments.”

“Which life insurance companies are offering child insurance plans?”

“Almost all the life insurers in India are offering these policies. You can consult your certified insurance advisor, she can suggest you good policies depending on your individual specific needs. But, one thing I can tell you please don’t buy ULIPs, as they are highly expensive, non-transparent and you end up paying hefty commission to agents.”

“Thank you, very much, HP!”

“Thank you, Vishal. ” 

 

As the local train reached Bandra station, I got off from it and strutted off toward my downtown BKC residence taking on the nice skywalks built recently by the local authorities for pedestrians.

 

 

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picture courtesy: Google