Insurance is an important part of personal financial planning. Therefore, it should be planned carefully. Insurance products are meant to deal with unforeseen events in life. Insurance is required in almost every aspect of life. Traditionally, in India, one used insurance only to cover risk to life. But over the last few years, other insurance products such as medical and loan insurance also picked up. Investments in insurance also qualify for income tax relief.
Every insurance product has its own positives and negatives. You should weigh the pros and cons carefully before taking an investment decision. It is also important to take the right amount of insurance cover. Taking more than the required amount drains money in terms of insurance premiums, while a lower insurance cover leaves certain risks uncovered.
These are some of the most talked-about insurance schemes in the market:
Life insurance
There are various ways to compute the required cover but most analysts recommend taking a life insurance cover equal to 4-5 times your annual income. There are three broad categories of life insurance schemes in the market.
Endowment life insur ance plan: This is the traditional insurance plan which provides insurance cover as well as gives returns on maturity. Most of these schemes provide returns in the range of 4-7 percent. Child plans and money back plans are variants of endowment plan.
Term insurance plan:
This is a basic pure insurance plan. The premium in this plan covers the risk element (mortality charge), sales and administration expenses, and therefore the premium is quite low as against an endowment plan for the same risk cover. The premium charged in term insurance does not have a savings element, and hence an individual does not receive any maturity benefits.
Unit-linked insurance plan (ULIP):
This plan is like a mutual fund with a life cover added to it. It invests the corpus in market-linked instruments such as stocks, corporate bonds and government securities (G-Secs). Investing in stocks is the basic difference between ULIPs and traditional insurance plans.
Health insurance
Medical treatment is getting more expensive by the day. Health insurance is becoming more popular. A health insurance policy not only covers expenses incurred during hospitalisation but also before and after hospitalization. For example, medical tests, medicines etc are covered.
Investments in a mediclaim policy are eligible for tax rebate under Section 80D of the Income Tax Act.
Loan insurance
These policies provide a cover for a loan in case of an eventuality. There are many options available in these policies. One can opt for loan cover only in case of death, physical disability, loss of job etc. Usually, it is recommended to take insurance cover on a home loan as the quantum of loan is quite significant here.
Insurance to cover assets
These policies cover assets such as house, valuables etc against fire, natural calamities and theft. Those living in risk-prone areas can add these covers to their insurance portfolio.
Strategies to pick insurance products
First of all, it is important to identify the risks that need to be covered and the amount of funds which can be allocated towards the insurance instrument. Choosing the most suitable insurance company is another important aspect, especially for health insurance. You can go by references from friends to identify one.
It is important to consider risks related to various aspects of life such as health, loans etc rather than just concentrating on life cover. It is always advisable to start early on insurance products (life insurance, health insurance etc).
Another important point to keep in mind is that one should invest in insurance instruments with the objective of risk cover. They should not be seen as investment instruments for returns.
