Every asset has an economic value and it provides some benefit for a certain period of time. After its life-time, the asset needs to be replaced with a substitute. However, there can be an unfortunate event like an accident which may destroy the asset (including human) early or make it incapable of generating any income. To reduce the financial effect of such adverse situations, Insurance comes into the picture. So, the simple rule is: all those things which will cause you economic loss to replace or reinstate, should be insured.
But practically it’s not possible because if you try to insure everything under this sun, you will be left with no money for your living expenses & goals. So one should consider two things before taking any insurance – probability of the event & financial impact. It can be simply understood by this grid.
| Financial Impact | |||
| High | Low | ||
| Probability/Recurrence | High | A | C |
| Low | B | D | |
- A (High Probability, High Financial Impact) type should be covered without any second thought – Ex health insurance & motor insurance.
- B (Low Probability, High Financial Impact) type can have significant financial impact so should be considering after looking at personal situations & assets Ex Term Insurance, Accidental Insurance & Critical Care Insurance.
- C (High Probability, Low Financial Impact) in this case decision should be made that risk should be retained Ex extended warranties.
- D (Low Probability, Low Financial Impact) such insurance can be outright ignored like loss of credit card.
Read – Best Medical Insurance for Parents
Sometimes probability of event occurrence can depend on your job profile or individual situation. Take the case of IT professionals, day and night they work in front of their computers or laptops. The prolonged sitting leads to problems such as back pains. This means they have a greater risk of physical health problems and so they will be more concerned about them. Now consider a manufacturing company. The probability of an accident taking place is high. For them, the probability of being involved in an accident is their biggest concern and so it will be their top priority. And what about professionals such as doctors? Have you ever thought of what could happen when a patient dies in a hospital and the family files a lawsuit against the doctor. It may not have been the doctor’s fault but sometime it takes years to get a decision in the court and the time spent can be disastrous, leave alone the loss of money. Then imagine what the consequences of the doctor losing the battle would be. The amount payable as compensation could be a big setback financially. So won’t it be on the priority list of professionals like doctors to get insurance for such risks.
Read – New LIC Jeevan Akshay
Insurance Policies that you may not need
There are some insurance policies which people generally don’t need:
1. Insurance for investment purpose – Insurance is an investment is a myth which companies or agents have played around with to maximize their earnings. Since we are use to looking at receiving a return on every penny we spend in our lifetime only, agents or companies push expensive products with return maximization strategies. This leads us to buy the wrong products every time. Don’t mix insurance and investments. This is also applicable on investment products which offer insurance benefits – some mutual funds offer benefit of health & life insurance if you invest in their schemes. These offers should be ignored as they will always come with some hidden T & C of exit loads & expenses. Also ignore health insurance policies which have investment component, go for plain vanilla health insurance products.
Read – Mixing Insurance & Investment
2. Life insurance for children – All parents want to ensure their child’s future. And to do this, some wants to by a child policy which can meet their child’s financial requirements. But buying a policy on child’s name is not the right solution as the objective of insurance is to support your dependents financially when you are no more. Hence, the insurance has to be in your name rather than the child.
Read – Child Future Plan
3. Excess Accidental Insurance (death) – Accidental insurance is a must have insurance but in India there are some limitations in the product. Biggest flaw is that in most of the cases accidental death is the base policy, which is already covered in the term insurance. So if someone already has sufficient life cover through term plan this insurance is not required. Lot of people also opt for accidental death benefit rider in case of traditional insurance policies. They should check their total life coverage before taking any decision. In international markets dismemberment policy can be bought with accidental death benefit, which is not the case in India. So check your cashflow before taking decision on this.
Check- What is Family Floater Health Insurance Policy
4. Wedding insurance & Flight Insurance – These will fall under low probability but high impact category. Flight Insurance can be clearly ignored as that will be covered under life insurance. Wedding insurance is a new category in general insurance which covers loss due to wedding cancellation, damage of property, personal accident & public liability. Accidental & property damage overlaps with comprehensive accidental insurance policy & householder insurance policy so is of less consideration. So it’s about wedding cancellation & public liability which can have significant financial impact. But in India people are more accommodating in case of cancellation of event in comparison to western world and add to it the list of exclusion in such policies, wedding insurance is still not in a priority list.
Read – 9 common Insurance Questions & their Answers
5. Credit card insurance – How many times you lost your credit card? Even if once, what’s the first thing that you did? I think you asked to block your card & the card company issued a new card. So my suggestion will be rather than taking insurance for loss of credit card, make sure it’s not lost or keep lesser limits card in your wallet.
But there is another issue. When you get credit card from bank or financial institution, they start pitching lot of insurance policies which are marketed as “especially available for our card holders” – health insurance, accidental insurance are the most common. In most of the cases, either these policies are expensive or come with lot of limitations. Moreover, insurance in these policies may not be transferred if you don’t want to continue with your card company. So why to stuck with such policies…. Just Keep Things Simple.
I know this is not the complete list & there can be few other policies that can be ignored – I will love to hear your views on the same.
dear hemant
as usual a good posting with apt advices.
.i feel most of the things covered are done by me without thinking too much.any way thanks for the post and expecting more apt advises.
drteny
Good Article. I have an experience. I have a credit card which has offerred Health Insurance. As mentioned in the article, they said “especially available for our card holders”. I was forcibly committed to have the policy. The next day I have checked the health insurance from the same insurance company having same conditions with which the credit card is having tie-up. To my surprise there is lot of difference. The credit card offerred the insurance at Rs.29,500/- and the same I got from the Insurance company at Rs. 8,500/-. I have cancelled the health Insurance offerred by the Credit card and I have taken the same with the Insurance company directly.
Hi Hemant!
Very apt advice. But it does not answer my Doubts. I am aware about all the facts you mentioned as i have worked in Insurance sector for 2 years in Underwriting. but confused for myself, which plan to buy. My purpose is just to cover mine and my Husbands life as we have a home loan running behind us. And for term plans , i think they are a waste of money, and for ULIPs i am totally aware about the charges, hence not intrested in them.. My objective is pure insurance , thats y i was thinking to go for Endowmnet plans. I know if objective is Only insurance then Term is better, but still i am not in favour of Term.
Dear Namrata,
Why do you think term plans are waste of money? How much insurance through Endowment do you have? Please check the premium for similar amount in term insurance. Then subtract that amount from your current endowment premium. Check the return at fixed deposit rates for the residual amount. Am sure this calculation will put things in perspective.
Regards
Pankaj
Term plan are best. Pure vanilla plan are best when it comes to insurance.
Hello Hemant,
Very good advise. I wish I was 20 years younger today to capture all the benefits it could yield now,should the advise was given to me 20 years back even at a cost. Anyway I have told many youngsters about your site and advises provided by you when they come to me.Also I would like to know about category of House/theft/burglery and Loan insurance?
Thanks
Nice….! one of my question is that. Can you give any suggestion on Birla mutual fund Century SIP, which cover life insurance.
Hi Swapnil,
Its a bundled product where Life insurance coverage has conditions attached to it. Wiser to invest in SIP for long term investment than for life insurance coverage.
Instead of money back policy, I personally think pure term insurance is better. I think you might agree with me that we should think why are we taking the insurance ?. Which goal are we going to achieve ?
I’m a bit confused on how term insurance is being sold at strikingly different premiums.I noticed in some cases, the premium is almost half of its competitors !!. To quote an example, a reputed insurance company offers Term insurance with a single premium payment facility of covering life for 1 Crore for just about 4 Lakhs. I’m not able to understand how are they able to do this. Its difficult to assess what we buy. Unlike a product purchase, where I can easily evaluate its woth either pre purchase thro enquiries or post purchuse through usage, in cases of term insurance, one doesn’t really get to know if the claim will be met. Requesting Hemant to throw some light on this.
Hi Rajiv,
Agree with you. Term insurance is the most viable means to avail a high coverage.
The trouble with ‘Money back ‘policy is that we are financially speaking -‘Na idhar ke na udhar ke. Neither insurance neither investment. Also please consider single premium Vs paying premium every year.Ask yourself this question that why are you taking this policy for ?
Also please consider inflation. In fact when I debated this issue with Kotak Life Insurance – they had no answer to my query that they have not inbuild inflation into their magnificent policy.
Hello Hemantbhai,
Very good advise.
Thaks a lot..
Dear Hemant
Can you please share your personal expertise on BHAGYA UDAY – LIC PACKAGE. was thinking to invest in this scheme considering getting returns for whole life.
Your veiws please.
thank you for your wonderful guidance and support.
best regards
Hi Brunette,
Can you provide some more details on this package from LIC.
Hi Vikas,
Pls find below the link for Bhagya Udaya Details.
Thanks
Nice one…Thankx…
Hi Hemant,
I am reader of your posts, not regular though. Somewhere in past, I read that we can paid up our LIC policies. My practical problem is below:
We have 4 Jeevan Saral policies taken 2 years back and just few months are remaining to complete 3 paid years. I want these policies to be cancelled as I have taken a Term Insurance. I approached LIC and they said that I will get nothing if I cancell those immediately however in case if I cancel those after completion of 3 years, I would get some amount i.e. 30%-35% of paid amount.
Kindly advise the sensible step should i take.
Thanks,
Rakesh Rege
Hi Rakesh,
Paid up is a viable option in a traditional insurance plans. But it is applicable only when you have paid three years premium. As far as withdrawing a policy is concerned, if you surrender it then you have to forego first year premium and then you receive approx 30% of the remaining premiums. Before three years are completed if you withdraw then you loose what you have paid. Whether to pay third year premiums, for this you need to analyse the opportunity loss and the impact on your expenses from the premium you are paying.
Even the returns on a fixed deposit are better. Mutual funds fer more superior. Pure vanilla products as Hemant bhai are far the best when it comes to insurance.
Hi Hemant,
I dont feel Term Plan is waste of money. As you are mentioning it comes under High Risk & Financial Impact is also high on your family (if you are the only earning member) In that case every one should go for a plain term plan without any rider.
Please correct me if I am wrong.
Rahul,
Term plan is surely the ideal means and you are right in saying that one should go for a plain term plan when looking for a family protection. But cost do also matter and when you have so many options available then its wiser to go for one which gives you lower payout.
Dear HEMANT
I completely agree with you bcos till now many people think life insurance as the best saving scheme for future planning as they get a big lump sum after 10 yrs or 15 yrs or even more. But they dont think about the value of that money at that time. this is only bcos they think life insurance as the most reliable thing.
After all a very good blog and hope people will make out the things clearer after reading this blog.
Kanhai,
Thanks for the appreciation.
Do share it with your friends..
Dear Shailesh Bhuskute,
Reading your comment, I had a slight feeling that the Health Assure plan that you are having needs to be reviewed!
If that’s from a Life Insurance Company, I am sure somebody met their target by you! And if its from a General Insurance Company, the “probability” of having the right product can be as high as 100%. I am sure you know probability is not surety! However, its recommended to review once.
Optima Restore is a very good option- Never heard any bad report thus far.
Thank you.
Sorry, the above comment was posted there by Mistake, Request admin to delete the same.!
We as a family members read your articles. Really following most of them and experiencing too.
thanks for that.
One thing noticed that you comments on LIC is more with respect to insurance than any private players, since we have been reading in the dailies about the private insurance rejections and their settlements on claims etc. Why it is so? since we have more LIC policies, at times worried whether we did a mistake.
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