Insurance Guide for Beginners : Having the right type of insurance is the essence of good financial planning. Some of us may have some form of insurance but very few really understand what it is or why one should have it. For most Indians, insurance is a great form of investment or tax-saving avenue. Ask the average person about their investments and they will proudly mention insurance products as part of their core investment.
Of the approximately 5% of Indians who are insured, the proportion of those who are adequately insured is much lower. Very few of the insured see insurance as pure as it is. Perhaps no other financial product has had such rampant misselling at the hands of agents who are too enthusiastic about selling products that link insurance to investments that earn them huge commissions.
What is Insurance?
Insurance is a way to spread the significant financial risk of a person or business entity to a large group of individuals or business entities in the event of a predetermined unfortunate event. The cost of coverage is the monthly or annual compensation paid to the insurance company.
In the purest form of insurance if a predetermined event does not occur within a specified period of time, the money paid as compensation is not recovered. Insurance is effectively a means of spreading risk among a group of insured people and easing their financial burden in the event of a shock.
Insured and Insured
When you seek cover against financial risk and enter into a contract with an insurance provider, you become the insured and the insurance company becomes your insurer.
In life insurance, this is the amount of money promised by the insurer to be paid when the insured dies before a predetermined time. This does not include bonuses added in the case of non-term insurance. In non-life insurance, this guaranteed amount may be referred to as Insurance Coverage.
For protection against financial risks provided by the insurance company, the insured must pay compensation. This is known as the premium. They can be paid annually, quarterly, monthly or as decided in the contract. The total amount of premiums paid is several times lower than the insurance coverage or it makes no sense to seek insurance at all.
The factors that determine the premium are the coverage, the number of years the insurance sought, the age of the insured (individual, vehicle, etc.), to name a few.
The beneficiary determined by the insured to receive the sum assured and other benefits, if any, is the nominee. In the case of life insurance, it must be someone other than the insured.
The number of years you want coverage for is the term of the policy. The period of time is determined by the insured at the time of purchasing the insurance policy.
Certain insurance policies may offer additional features in addition to the actual coverage. This can be availed by paying an additional premium. If these features are purchased separately, they will cost more. For example you can add a personal accident driver to your life insurance.
Shipping Value and Paid Value
If you want to leave the policy before the expiration date, you can terminate it and get your money back. The amount that the insurance company will pay you in this case is called the surrender value. That policy no longer exists. On the other hand if you just stop paying the premium halfway but don’t withdraw the money, the amount is referred to as a deposit. At the end of the term, the insurance company pays you in proportion to the amount paid.
Now that you know the terms, here’s how insurance works in simple words. Insurance companies collect premiums from a large group of people who wish to insure certain types of losses. With the help of its actuaries, the company makes a statistical analysis of the actual probability of loss incurred for a certain number of people and fixes the premium taking into account other factors as previously mentioned. It works on the fact that not all insured will suffer loss at the same time and many may suffer no loss at all within contract time.
Potentially every risk that can be measured in terms of money can be insured. To protect loved ones from loss of income due to premature death one can have a life insurance policy. To protect yourself and your family from unexpected medical expenses, you can choose a Mediclaim policy.
To protect your vehicle from robbery or accidental damage, you can have a motor vehicle insurance policy. To protect your home from theft, fire damage, flooding and other hazards you can choose home insurance.
The most popular forms of insurance in India are life insurance, health insurance and motor vehicle insurance. Apart from this there are other forms as well which are briefly discussed in the following paragraphs. The insurance sector is regulated and monitored by the IRDA (Insurance Regulatory and Development Authority).
This form of insurance provides protection against financial risks in the event of an early death of the insured. There are 24 life insurance companies playing in this arena of which Life Insurance Corporation of India is a public sector company. There are several forms of life insurance policies, the simplest of which is a term plan. Other complex policies are endowment plans, lifetime plans, cash back plans, ULIP and annuities.
All other insurance policies other than Life Insurance are included in General Insurance. There are 24 general insurance companies in India of which 4 namely National Insurance Company Ltd, New India Assurance Company Ltd, Oriental Insurance Company Ltd and United India Insurance Company Ltd are in the public sector domain.
The largest share of non-life insurance in terms of premiums covered is shared by motor vehicle insurance followed by technical insurance and health insurance. Other forms of insurance offered by companies in India are home insurance, travel insurance, personal accident insurance and business insurance.
There are several policies to choose from. Since we cannot predict our future and stop unpleasant things from happening, having insurance coverage is a must. But you have to choose carefully. Don’t just follow what the agent tells you. Read the policy document to find out what is covered, what features are offered and what events are excluded from coverage.
1. Know Your Needs
Determine what assets or incidents must be protected from loss/damage. Do you live, health, vehicle, home? Next determine what type of damage or hazard is most likely to occur to the asset. This will tell you what features you should look for in a policy. Of course there will be losses that cannot be foreseen and the handling costs can be very high. For example, no one can predict that they will never suffer from a critical illness no matter if they are in perfect health at this time.
The biggest mistake in buying insurance, especially life insurance is to view it as an investment. Clubbing insurance and investing in one product is a bad idea. You lose on both sides because the premium you pay more coverage can get in the term plan and if the premium is invested in better instruments your returns can be several times more.
Beware of agents who want to persuade you to buy unnecessary policies such as child life insurance, credit card insurance, unemployment insurance, and so on. Instead of buying separate insurance for a specific asset or incident, look for a policy that covers a number of possible events under the same coverage. If possible, choose a sensible rider rather than buying them separately.
Unless there’s a fair chance of an event occurring, you don’t need insurance for it. For example, unless you are highly prone to accidents and disability due to the nature of your job or other reasons, you do not need an Accident Insurance policy. A good Life Insurance policy with accidental death riders or premium rider waivers or disabled income riders will do the job.
2. Understand Product Features and Costs
The worst way to choose an insurance product or insurance company is to blindly follow the recommendations of agents or friends. A good way to do this is to look for products that match your needs and filter out those that offer lower premiums for similar terms such as age, amount of coverage, etc. All the details you need about the features and cost of the product will be provided on the company website.
Many insurance policies can now be purchased online. Buying online is smarter as premiums are lower due to the elimination of agent fees. If buying offline for life insurance, tell the agent that you are only interested in term insurance.
Before you sign a contract make sure you understand what items are covered and what items are excluded from coverage. It would be very sad to know in the event of damage or loss that the item you were hoping to cover with insurance is actually excluded.
So many people rush to their insurance company after being treated for an illness only to realize that certain illnesses are excluded. Understand details such as when coverage begins and ends and how claims can be filed and losses reported.
Don’t choose an insurance company because your neighborhood friends are their agents and don’t let them persuade you to buy from them. Insurance premiums run for years and that means quite a large amount of money. Regardless of the premium charged, look for the services provided.
When you are in danger, you want the claim collection process to be complicated with uncooperative staff in the insurance company’s office. Seek answers from people who have previous experience with the company for questions such as how customer-friendly and responsive the company is in handling claims.
3. Evaluate and Improve Timely
As you move from one stage of life to another or when the insured assets change, your policy should be reviewed. Maybe your protection needs to be increased (or decreased) or you need to increase it with the rider. Some examples when you need to review your coverage are when you get married, when you have children, when your income increases, you decrease substantially, when you buy a house/car and when you are responsible for your aging parents.