Financial Planning Part 3: Buying The Right Insurance Coverage For Financial Protection
Get expert financial advice on how to buy the right insurance coverage for financial protection from the best personal finance management advisors.
In Part 1 & Part 2 of this series on financial planning, we shared expert financial advice and tips to save money and listed a number of investment planning options to help you invest money to meet your financial goals.
In this part of the series, we share insights and financial advice from the best personal finance management advisors on buying the right kind of insurance coverage for financial protection.
Buying Insurance Coverage For Financial Protection
In her session on Why Do Women Need To Buy Insurance More Than Men?, Dipika offered some expert financial advice on buying insurance coverage for financial protection.
Understanding insurance products
Insurance is provided by insurance companies, not banks. There are nationalised insurance providers like LIC and private ones like HDFC and ICICI, among others.
Insurance is not to be confused with investment. An insurance policy provides protection for your family. In case something happens to you, they are protected from financial losses.
Unfortunately, insurance products are sold to us as an investment, promising returns in the future, and that has made people skeptical of taking the right insurance.
Gender does plays a role in insurance, as when it comes to life cover, the majority of women are underinsured. Many don’t have insurance coverage at all. And women need life insurance more than ever before, regardless of career choice or marital status.
Women tend to take career breaks which can impact the insurance amounts, hence it is ideal we take significant insurance coverage in our working years.
One needs to have life insurance, health insurance plans, and critical illness cover at the very least.
Types of life insurance
In life cover, there are 3 types of life insurance plans - term plans, endowment plans and ULIP. Term life insurance (term insurance plan) should be bought for the sole purpose of covering the risk on one’s life and not as an investment.
Life insurance premiums are typically lower for women due to our longer lifespan and lower mortality. Although one's life or death can't be measured by money, when it comes to buying a life insurance policy we’re forced to put a number on it.
So what exactly is life insurance for? The primary purpose of life insurance is to replace a lost income when a provider of the family dies. The right type of life insurance we need is called term insurance.
A term insurance plan is a form of life cover that provides coverage for a defined period of time, and if the insured expires during the term of the policy then death benefit is payable to the nominee.
Term plans are specifically designed to secure your family needs in case of death or uncertainty. It provides a specific amount of coverage for a specific period of time. Term insurance has existed forever but no one talks about it as the agents do not earn enough commission from it.
For millennial parents, a concern for their kids' financial future is the key trigger to buying term insurance, which is why maybe it is getting more popular. When taking a life insurance policy, look at a reputable company and choose the cheapest premium amongst them.
The savings and investment plans are part of Endowment and ULIP plans, in which the costs are very high, hence the returns are very low. So it’s better to avoid the endowment policy and ULIPs.
The ideal age to start life insurance is as soon as you start working. You can start with 5x of your annual income and increase it over time. For example, if your annual income is ₹5 lakhs then you can start with taking a 25 lakh sum assured, for which the premium may not be more than 3k per annum for a term policy.
Types of health insurance
Women are not very cautious of their health. Increasing heart-related diseases, gestational diabetes, cancer, reproductive health, depression are just some of the reasons why women in India need to buy health insurance at the earliest.
With pollution, adulteration and lifestyle diseases showing an upward trend, infertility treatments have become quite common, putting a dent in any family’s financial health.
It is important that you disclose all your pre-existing health conditions related to your health before taking a Mediclaim policy. Medical insurance plans from HDFC and Cigna TTK Apollo Munich are good.
Term life insurance is a must if you are working, health insurance (preferably covering maternity) is crucial for women irrespective of career status. The earlier you take term insurance in your working years the better for you as it is much cheaper at that time. The premium you take it at gets locked in for the term of the policy.
Critical Illness cover is also very important. A critical illness insurance policy works differently than a medical insurance policy. A CI plan is a health insurance plan that pays a lump sum amount, equal to the sum insured, to the insured on being diagnosed with a serious ailment, such as cancer or a stroke.
It can pay for the cost of care and treatment, recuperation expense and even pay off any debts that were taken. Regardless of your hospital expenses, the insurer pays the full sum insured. It is not a commonly purchased policy, but much required.
To sum up, if you’re a working professional, you need term insurance, health insurance and a critical illness policy. If you’re not working then health insurance and a critical illness policy are a must!
Just like one can insure life, health, home, vehicle etc, there are policies which offer cover in case of job loss. In India, job loss insurance does not come as a standalone policy, but comes as an add-on with a health or accident policy.