CHOOSE THE RIGHT INSURANCE

Every insurance policy is designed to meet a specific need. Find out the policies that will suit you at different stages of life

    The phone rings. It's a wealth manager with an offer of a triple benefit investment plan. You can save tax, grow wealth and even enjoy life cover. The best part is that the plan guarantees the highest NAV achieved during the next seven years. Even if the markets fall in later years, you get the historical high rate. 
    Before you latch on to this golden opportunity, ask yourself three questions. 
Do you need life insurance? 
How much cover do you need? Finally, does the plan fulfill your financial requirements? 
    Your answers could help you take a better decision on what experts say is the lynchpin of any financial plan. 
    Buying life insurance is a national pastime in India. After bank deposits, it is the most favoured destination for household savings, accounting for almost 25% of the wealth of small investors. Noidabased software professional Gaurav Tiwari has bought 12 endowment plans in the past nine years. 
    Much as Indians love to buy life insurance, they are not buying the cover they really need. Tiwari's dirty dozen gobbles up 71,000 in premium every year, but offers a cover of 14.4 lakh. This is very low, given that he has outstanding home loans of 11 lakh. But it is better than the national average of about 1.16 lakh per policy sold till now. The figure is improving but has a long way to go. The average life insurance cover of policies sold in 2010-11 was 1.93 lakh. "Investors need to strike a balance between the risk cover and investment in their insurance portfolios. Most of the time, there is a skew towards investment, while insurance gets neglected," says Deepak Sood, CEO and managing director of Future Generali Life Insurance. 
    At the root of the problem is the advice given to the investor by the insurance agent. Till a little over a year ago, Ulips were being peddled as the best investment you could ever make. But after the new guidelines issued by Irda in September 2010, agents have started pushing traditional policies. A distributor earns 30-40% commission from selling a traditional policy compared with 8-12% from a Ulip. 
The essential covers 
The basic purpose of insurance is to serve as hedge against risks. Therefore, pure protection plans should be the foundation of your insurance portfolio. A term plan, for instance, is your protection against the risk of early death. It provides the family of the policyholder with a corpus that can replace his income. Experts say that a term plan should be an individual's first life insurance policy. "It is even more important than a bank account," says T.R. Ramachandran, managing director and CEO of Aviva Life Insurance. 
    The earlier you buy a term insurance plan, the better it is for you. At a young age, when your health is in fine fettle, the premium is unbelievably low. At 25, a man will pay about 7,500 a year for a cover of 1 crore for 35 years. As he grows older, the premium shoots up exponentially (see charts). If he buys the same cover 10 years later for 25 years, the premium is higher by 50%. Within the next 5 years, it will shoot up by another 50%. 
    A term plan alone isn't enough to cover the basic risks that life throws at us everyday. You also need a medical cover to guard against high expenses due to an illness or injury.Health insurance is perhaps more important than even term insurance because the chances of someone in the family requiring medical care is higher than a person dying. Also, while the term plan covers only the breadwinner, the medical policy covers the entire family. 
    It helps if you have medical insurance from your employer, especially if you are well-settled in your job. If you intend to switch jobs, you may need to buy a medical insurance plan on your own so that there is no break in the cover when you change jobs. 
Covering against disability 
The roads are full of idiots. Unfortunately, even the best tyres can't avert accidents. According to the World Health Organisation, India is the road accident capital of the world. The National Crime Records Bureau statistics show that every three minutes, an Indian dies in a road mishap. An equal number of people is grievously injured. An accident can leave a person bed-ridden for months. Worse, he may be disabled for life. Why only extreme road mishaps? You can get hurt even at home—miss a stair, slip in the bathroom, trip in the garden. Are you covered against the income loss due to a disability even if it is partial or temporary? 
    A personal accident and disability cover is inexpensive but very critical. You can choose the extent of the cover you want. While the basic policy will cover death due to accident, you can enhance the scope of the policy to include permanent disability or even a temporary one. The wider the cover, the higher it costs (see table). Incidentally, the cover comes bundled with a comprehensive home insurance policy. 
    The size of the cover depends on your income. The New India Assurance Company, for instance, restricts the cover to 72 months' income. Also, the disability must result in loss of income. If you break your leg and proceed on paid sick leave from office, you can't make a claim.