The Need for Insurance
Coming from an Investor and a capitalist:
“Life Insurance is the only tool that takes pennies and guarantees dollars” – Ben Feldman.
I would never forget the words of my former Finance teacher, it is better to carry an umbrella than wait for the rain; buying Insurance is similar to buying an Umbrella. It protects us against uncertainty and more so against ourselves.
First of all let us do a fact check:
In India, Life insurance penetration was 3.2 percent while non-life touched the magic figure of 1 percent in FY21. A year ago, it was 2.82 percent for life and 0.94 percent for non-life. Seems pretty low right, for a country with a 1.4bn population. Yes, it is. And this is only because of personal finance unawareness.
Now, let’s dive directly into it, since we want to discuss a whole lot of things.
There are 100’s of Insurance products in the market today – a range of variants of Life Insurance, Health Insurance, Critical Illness and Permanent disability. Our understanding suggests that a plain vanilla term plan to go with adequate health insurance cover is sufficient to cover an individual’s insurance needs.
An individual does not need to go for hybrid insurance products, where the distributors get roughly a quarter of the revenues as commission. Yes, 25%. Regardless, they shouldn’t even be called insurance products since by definition, the risk management of these products is very low, while also giving low returns from its investment.
Now, coming to Life Insurance, the traditional term plan should do the trick but it should be taken as early as possible. Fundamental function of Life Insurance is to provide financial protection to families against two major risks: mortality & morbidity. General rule of thumb is to get 25x your annual salary cover; there is a large amount of financial and economic assumptions that go into calculating the appropriate cover.
Let us understand this from the perspective of an example: Say an individual earns 10 lakhs annually and takes 25x annual cover. In case of death, the dependent people of the Insured would receive Rs. 2.5 cr. Say they put that into a savings bank yielding 4% annually. The family members would get Rs. 10 lakhs (sum lost due to death) annually, thus replacing the lost income. Hence, 25x is a general and easy assumption while calculating the insurance amount.
Claim settlement ratio for few big insurance providers is upwards of 95%, with over 95% of claims settled in the first 30 days. These are term policies that deserve allocation in every portfolio.
“You don’t buy life insurance because you are going to die, but because those you love are going to live.” – Anonymous
Another important aspect to shore up insurance needs is getting a health plan. This is where it gets trickier. With a term plan, the company cannot refuse payment after three years irrespective of what the reason according to a new law. With health insurance, there are dozens of minutia that need to be paid attention to: home care, hospitalisations, tests and a whole lot of other factors which need to be properly verified.
The main reason for getting health insurance is to cover high and forever increasing cost of healthcare whenever the need arises and hence one must be more cautious while selecting the plan, as they could regularly pay, but still not get the benefit when needed.
These are few key points to look out for:
· Whether the plan provides hospitalisations, Pre-hospitalisation, Post-hospitalisation coverage?
· Is there a list of attached hospitals?
· Does the policy offer cashless facility?
The world we live in is full of uncertainties and risks. Individuals and families are exposed to different types and levels of risks. These include risk of losses of life and health. While it is not always possible to prevent unwanted events from occurring, financial world has developed products that protect individuals against such losses by compensating them with financial resources. Insurance is a financial product that reduces or eliminates the cost of loss or effect of loss caused by different types of risks.
Until next time….