Portfolio Management: 5 must-have insurance policies

Portfolio Management: 5 must-have insurance policies
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First Published: Mon, Jul 02 2007. 01 04 AM IST
Updated: Mon, Jul 02 2007. 01 04 AM IST
Not very long ago, taking out an insurance policy meant talking to a local Life Insurance Corp. of India agent and signing a bunch of forms for a plain vanilla life insurance policy.
But, with the entry of private insurance companies in 2000, there is now a bewildering array of choices, not only in the number of providers but also in tailor-made insurance products. These range from policies that cover life to those that protect against liabilities, such as the inability to pay home loans or theft and fire.
“Many of us don’t actually chart out our insurance needs,” says Rahul Aggarwal of Optima Risk Management Services, a New Delhi-based insurance broking firm. “We simply take up the most aggressively marketed policy. It is very rare to come across people who plan out their insurance portfolio according to their earnings and age.”
Here are five must-have insurance policies:
Life insurance
Life insurance products typically comprise term plans, endowment plans and unit-linked insurance plans (Ulips). All these policies pay a predetermined sum if the insured dies before the policy matures. However, in case of term insurance, all premiums paid are used to cover the cost of insurance protection. While in endowment policies, in addition to the premium paid, you also earn a bonus, in Ulip, you predominantly invest in stock markets.
A term policy typically ranges from one year to 20, though it could be longer in some cases. The insurance coverage also ends when the term of the policy expires, which explains why the premiums on such term insurance policies are relatively lower than in other life insurance policies.
Of late, a number of companies have started paying the premium back on their term insurance plans. For instance, in Birla Sun Life Insurance Co.’s “premium back term plan,” the entire amount is returned to the insured at the end of a policy period. “Ulips, which predominantly invest in stock markets, have an element of saving in them. That is why they are comparatively costlier than term plans, and, therefore, you don’t invariably get the desired coverage amount,” says Sanjiv Bajaj, joint managing director of Bajaj Capital, a financial services company. Experts suggest you should opt for Ulip policies only after the required sum assured has been taken under a term plan.
When do I buy a policy?
The ideal age to buy a term policy is when you are between 30 and 35, because the older you are, the higher will be the premium. Once you have sufficient cover and have saved enough money, you can invest in other savings-linked insurance plans.
How do I decide the sum insured?
It should ideally be 100 times your monthly salary if the personal accidental policy is not opted for. Otherwise, it should be 50 times. The premiums will vary depending on the age: it will be approximately 3% of the annual salary if you insure for a sum equivalent to 100 times of the monthly salary and if you are between 30 and 35 years of age.
What should I watch out for?
If you opt for a Ulip scheme, don’t fall for the agent’s false promises of earning a steady lucrative income. Such schemes are designed to provide illustrative returns on the basis of an assumed return of 6% and 10%. Premiums are quoted for a sum assured of Rs1 lakh. You should also activate the waiver of premium rider option. This ensures that in the event of any mishap befalling you, the insurance company will take care of your remaining premiums.
Personal accident policy
Such policies compensate the insured in the event of disability caused by an accident. Though term life policies, too, have personal accident riders, they do not provide cover for temporary loss of income. This cover compensates for the loss of income if the insured is bed-ridden for a long time after the accident. A separate personal accident policy also reimburses medical expenses to a certain extent. The premium paid on such policies is around Rs180 for every Rs1 lakh of sum assured.
When do I buy a policy?
The ideal time to take this policy is when you are in the age group of 25-30 years because when you start early, the premiums are less and not too taxing on your income.
How do I decide the sum insured?
It should be 100 times the monthly salary if term policy is not taken. Otherwise, it should be 50 times. You can also decide on the sum by calculating the monthly expenditure of the house: It should be equivalent to the shortage in monthly expenditure if you are unable to contribute in future.
For instance, assume that you incur a monthly expenditure of Rs40,000 for supporting your parents who are in the age bracket of 50-55 years. If you get Rs25,000 from pension income and Rs15,000 from your salary every month to meet the monthly expenditure, you need to invest in such a way that your parents continue to get Rs15,000 even if you are not there to support them. So, you need to take a cover of around Rs23 lakh so that they continue to get an interest income of Rs15,000 every month. (It is assumed that interest rate is 8% annually or 0.66% monthly—15,000x100/0.66). So, if you are 25 today, you need to take a personal accident policy with a cover of Rs23 lakh, which would cost you around Rs3,600 annually.
What should I watch out for?
The policy should also have cover for permanent disability, partial disability and temporary loss of income, as well as reimbursement of medical expenses.
Health insurance
With the cost of health care spiralling every day, this is one policy you cannot afford to leave out.
When do I buy a policy?
Insurance companies classify rates into two categories: for those below 26 years, who have to pay less, and others. Since the beginning of this year, insurers are also allowed to charge higher premiums from people in high-risk category. For example, smokers and elderly people need to pay a higher premium now. It is advisable to get a policy as early in life as possible.
How do I decide the sum insured?
It depends on the kind of hospital you would like to be admitted to in the event of an illness. If you start at an early age, you need not pay a high cover, but as you grow old, it is advisable to increase the cover amount. Typically, a 25-year-old can get a cover of Rs1 lakh for a premium that can range from Rs700 to Rs2,612.
What should I watch out for?
1) Ascertain if pre-existing diseases are covered after two to three years of continuous cover.
2) Find out what is the duration of the pre-hospitalization and post-hospitalization period.
3) The maximum age till which the policy will provide cover.
4) Ask if there is any co-payment.
5) Also, ask if there is any limit on reimbursement of expenses incurred on certain diseases.
6) Are any specified diseases excluded for a certain period? What is the duration of such exclusions?
Auto insurance
Auto insurance covers you against two kinds of financial losses: damage to your own vehicle and damage by a third party. Though none of the policies cover medical expenses, the motor insurance tribunal covers medical claims on account of loss of salary income due to hospitalization or any other disability. Incidentally, third-party insurance is the only insurance compulsory under the law. If you are insuring yourself, you have the choice not to take it up.
When do I buy a policy?
You should get your new vehicle insured even before you bring it out on the road, unless, as stated in the law, you have bought it to drive only within 1,000 acres of the office building.
How do I decide the sum insured?
You cannot decide the cover of the policy in an auto insurance. You need to pay an annual premium depending on the vehicle you own and its age. You need to, therefore, reset the insured value each time the policy is renewed.
What do I watch out for?
Always check if you have cashless facility on auto insurance. Cashless options will save you from the hassle of tedious reimbursement procedures. Also, it is advisable to have a comprehensive insurance.
Property insurance
These policies cover all valuable assets, such as house, white goods including ACs and refrigerators, and even jewellery. Loss due to burglary or an attempted robbery of valuables too can be covered. However, items more than 10 years old will not be insured.
When do I buy a policy?
1) If you own a house. There is no lower limit for home insurance. You can get it insured even for a small sum of Rs10 lakh.
2) If you have expensive furniture or electronic gadgets even it’s in a rented house.
3) If your house is located in high-risk area prone to floods, earthquakes or burglaries.
4) If have valuable plate glass doors and windows in your house.
How do I decide the sum insured?
You cannot insure the property for a value that is more than the cost of construction stated in the agreement. You are allowed to claim reimbursement only up to the cost of reconstruction. Simply put, the sum insured should be equivalent to the sum of the new replacement value of contents of the house or covered area of the house multiplied by 1,000.
What do I watch out for?
Ask your insurer if he is willing to cover jewellery, air conditioners and other electronic equipment against breakdowns if they are more than three years old. You also need to keep all documents in place to support the value of equipments at the time of claiming reimbursements.
Write to us at businessoflife@livemint.com
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First Published: Mon, Jul 02 2007. 01 04 AM IST