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Insuracne Planning - Choose cover based on need

You need to choose your insurance based on need and not just to meet tax deduction needs.
Life involves facing risks all the time. Everyone faces risks to life, health and belongings. The question you need to ask yourself is whether you have a back-up plan in the event of the unexpected happening to you. Insurance is the perfect answer. Insurance provides protection against the risk of financial loss. While there is growing acceptance that insurance is vital, often there is confusion on what kind of insurance one needs to take, and how much insurance is adequate.

There are three broad categories of risks for which a person would require insurance. Personal risk - unemployment, death, disability, illness or accident which could affect the income-producing ability of an individual is one. Property risk - something that may result in loss or damage of an individual's personal property such as fire, theft, flood, earthquake etc is the second. Liability risk - something that exposes a person to third party liability, especially relevant in case of professionals such as advocates, accountants etc is the third.

The first step in planning insurance is to identify risks that you are exposed to. For example, if you are the bread-winner of the family and have dependants, life insurance is of paramount importance. If you own a car, it is crucial to have a motor insurance to take care of damage or theft as well as third party liability. Once the risks are identified the next step is to choose an appropriate insurance product.

Personal insurance consists of insurance plans that are available to individuals for protection against financial loss.

There are three types of personal insurance:

Life insurance

Life insurance is a product which protects both against an early death as well as living a long life. Products like term insurance, whole life plans, endowment and investment-linked products can protect and shield the deceased's family from the financial consequences in case of unfortunate early death of the insured.

On the other hand, sometimes due to long life, one may outlive his economic resources. Pension plans and annuity schemes ensure that so long as the person is alive, he would have some source of constant income.

Accident and health insurance

An accident policy protects the insured against loss due to an accident which could lead to death or disability. This becomes extremely crucial, in case of disability, to take care of loss of income and well as burden of supporting the victim. A health policy is important not only for the income earner but also for the family. As medical expenses are usually high, an adequate insurance cover helps in availing uncompromising care and best of facilities.

Property and liability insurance

This protects the insured from monetary losses due to damage or loss of property. It covers house, car, valuables etc or a legal liability due to third parties - car insurance, householders' policy, directors' liability etc.

Once the right insurance products are chosen, it important to discuss it with your insurance advisor to figure out how much insurance is required. In case of life insurance, there are different methods to identify the insurance need such as life value, income multiple, need-based approach etc. The thumb rule says that you must at least be insured to the extent of 8-10 times your annual income.

Investment products such as unit-linked insurance policy (ULIP) should be understood carefully for its relevance, costs and benefits, and not taken just to meet tax deduction needs. Seek the help of your insurance advisor to understand the nuances of different types of policies and select the right products based on your need. Remember, insurance is not mandatory, but the cost of not having a cover is very high.

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