Sunday, November 08, 2009

5 Must-have Insurance Policies

I am back to my favourite topic of insurance again. I have written in the past about the importance of insurance and reviewed some of the common insurance policies. This post would be about what all insurance policies should one take?

I would categorize insurance policies under two categories - Policies that offer protection to (1) Self and (2) Valuables.
The three most important policies for self are Life insurance, Accident insurance and Health insurance. Home insurance and motor insurance are the most important from a protection of valuables angle.

Life insurance offers protection against the loss of life of the insured. The protection is in the form of financial means by which the dependents are compensated in the unfortunate event of death of the insured. Consider an example - Mr.X's family comprises of his unemployed wife and two childern aged 2 and 5. If Mr.X dies, and he is not insured or under insured, his family will not only have to deal with his loss for the rest of their lives, but also the loss of the sole bread winner. So it is crucial to assess one's insurance need (what he/ she need to leave behind for dependents, in case of unfortunate death) and associated costs (by way of premiums). The best form of life insurance is term plan - which offers maxiumum sum assured for the minimum cost. But usually insurance companies and agents under promote such plans (as their profit is less in term plans) and even advise against them by citing no returns. Please keep in mind that plans that offer returns can be prohibitively expensive for the same sum assured. (for e.g, for a sum assured of Rs.10 lakhs, term plan premium may be less than Rs.5,000, whereas a money back policy may cost Rs.25,000 or more!)

Accident insurance is somewhat similar to life insurance, but enhances protection by extending coverage to diasabilities arising out of an accident and adding on to overall life cover. These plans too are very cost effective - a personal accident plan with a coverage of Rs.10 lakhs may cost around Rs.1000 only. If we consider the case of Mr.X and his death was caused by an accident, his dependents would get sum assured from his life insurance as well as accident insurance. If he is left disabled, then he will get some financial respite from his accident insurance coverage.

Health insurance provides cover against hospitalization. Going back to Mr.X, suppose he was diagnosed with a heart problem that needed surgery and hospitalization for a period of 2 months. Given the costs involved with speciality health care, a hospitalization/ surgery costs can easily run into five digit bills. This financial burden on Mrs.X would only aggravate the trauma of illness, surgery and hospitalization. A family floater plan (which covers all four family members of Mr.X) with a coverage of Rs.3 lakhs, would be around Rs.5,000 - a far less costly option for the fianacial security.

Home insurance is important because the home is perhaps the most valuable asset for anyone and so is Motor insurance because of the risk attached while driving on our roads everyday. Motor insurance is mandated by law to cover third parties - whereby it will cover damages to third parties involved in an accident. Comprehensive insurance offers cover to own vehicle as well as third parties.

Insurance can be considered as a trade off - a relatively smaller cost (premium) expended to cover (assured sum) potential damages to something valuable (e.g. health, home). The valuable may or may not be replaceable, but its financial impact can be minimized if it is covered under an insurance policy. As a thumb rule, insurance should always be treated as an expense (avoid mixing it with investments, as the purpose of both are completely different)

Life insurance, Accident insurance and Health insurance are must have for anyone with a dependent family and Home insurance and Motor insurance for anyone who owns a home and motor vehicle. There are extensions and variations of these basic policies offered by insurance companies. The need, benefit and costs of such policies need to be analyzed in depth before opting.

Disclaimer: The views posted in this blog are my own and are based purely on my own way of assessments. Readers are  requested to consult with their financial/ insurance advisers before making any investment/ insurance decision, do their own due diligence and validate factual information.

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