The insurance business in India isn’t just growing, but also becoming more sophisticated in terms of product offerings. To help readers keep ahead of developments in this business, Mint features a Q&A on insurance every Monday.
I am a 30-year-old married male earning about Rs10 lakh per annum. I have one whole-life and two term policies and am also planning to invest in pension. Am I adequately insured or am over-insured?
Insurance needs are specific to each individual, depending on his financial responsibilities and liabilities both pre- as well as post-retirement. Many experts recommend that you should purchase insurance worth 5-10 times your current annual income.
This is an old thumb rule that does not take into consideration current assets and any special needs you and your family may have. The most logical way to determine the amount would be to undergo a financial health check (FHC). Depending on your life stage and earnings, the FHC assesses and recommends the right insurance product for you. You may want to start by determining the amount of income that you would like to replace and the number of years you need to replace this income.
In addition, you may want to consider funding future expenses, such as children’s education, retirement, and any special needs your family may have. For this reason, many individuals choose to invest generous amounts.
How does a pension plan score over a normal savings instrument such as public provident fund (PPF)? Since it does not offer any guaranteed return and whatever returns it will offer will in all likelihood be less than that of PPF/national savings certificates—isn’t it better to go for a term insurance and put the difference in savings instruments such as those that at least offer guaranteed returns?
Different investment instruments cater to different needs. The benefits specific to investments made in pension plans include regular income after retirement; tax benefits under section 80CCC for all income groups; and no upper limit on investment.
Some pension plans also offer life cover. They also provide long-term returns where you can benefit from the expertise of companies.
The investment made in a personal pension plan can be market-linked and can therefore offer higher potential returns as against investments in the PPF. Further, the rate of return in PPF is not fixed and can be changed anytime.
Readers are welcome to write in with their queries to firstname.lastname@example.org. The questions will be answered by senior executives from leading insurance firms.
This week’s expert is Bert Paterson, managing director and CEO, Aviva India.