Lesson 3: Getting Insured

Dear Friend,

I hope you have gone through my initial 2 posts and have made the provision for your Emergency corpus and started saving money through Recurring Deposit or Fixed Deposit.

Next Step of saving should be getting insured. Please do not take Insurance lightly and think of getting insured in next 5-10 years.

This is one of the biggest mistakes that you can do.

Today I will tell you about two types of insurance that we need: Life Insurance and Health Insurance.

1)  Life Insurance:

What is life insurance? Life insurance is the shield or protection against the financial loss which may happen in case of unfortunate demise of the earning member of the family. Any such calamity is always unforeseen, so you must be prepared to face it always. Life insurance provides a lump sum amount for family to take care of its financial needs like Loans and liabilities, children's tuition fees, daily expenses, etc. for some years.

Who should be insured? The earning members of family should be insured.

How much insurance is required? Ideally you must take a life cover of approximately 20 times of your Annual salary.

For Example: Suppose Gaurav joined a company with a starting package of 4 lakh. So his life cover should be around 20*4 = 80 lakh. This is also the maximum limit put by IRDA (Insurance Regulatory and Development Authority).

I am suggesting going for the higher limit of life cover because as you move up the ladder in your professional life your salary will increase, but generally you will not care to increase insurance cover by similar amount. So taking a high cover initially is a wise idea.

Which policy to choose? There are many plans available in market today. Some of the biggest Life Insurance providers are LIC, SBI Life Insurance, Bajaj Allianz, Bharti Axa, HDFC Life insurance and many others.

Plans offered by them are of many kinds, but my simple suggestion is stay away from all and only go for “TERM PLANS”.

Terms plans are the simplest form of Insurance in which you pay the relatively lowest premium to get a high coverage. Please keep Insurance and Investment separate. Insurance should never be seen as an investment option. You should always try to get the maximum cover at minimum price.

To avail any Term insurance, you need to pay monthly/quarterly/yearly/one-time premium. Premium amount remains constant throughout the policy term. Policy premium amount depends on Age of the person, Number of years for which Policy is taken, Health and habits of Person, Being Smoker or non- smoker also affects the policy premium. Whatever it is state every detail correctly to your Insurance Company. This will help to reduce the chance of claim rejection.

Example: Suppose Gaurav, 25 years old, plan to buy a Term Insurance plan of Rs. 80 lakh for 35 years (i.e. till he reach 60 years of age). Below are some of the options he has (Image just for reference, actual data may differ from shown image).

In below image, Claim settlement ratio, suggests the % of claim settled by company in favour of the person. Like 92% claim settlement ratio means company has rejected only 8% claims for some reasons, rest were paid the lump sum amount as per the insurance contract. Higher the claim settlement ratio, better the insurance policy for the Person.

Bonus Tip: Premium amount paid towards the Life insurance policy will get you tax rebate under Section 80 (C). This is like double benefit of getting insured and getting tax rebate also.

Please stay tuned for the next part where I will provide you details about the Health insurance.