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How to ensure you have right amount of insurance

July 28, 2009 13:36 IST
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Insurance is the most ignored aspect of our financial plan.

While investments are the kings of our financial plan, insurance is often overlooked by both the investor and financial planner. Some investors don't understand the importance of insurance, other investors are confused between the various complicated insurance products available in the market.

So they either invest in complex products like ULIPs or money-back policies or they don't bother with the insurance.

But this is a big mistake. Insurance is very important as it protects you and your family against any unforeseen events like death, accident, illness or natural disasters like floods or cyclones. Failure to take correct insurance cover may mean you will have to stop your investments and redeem them to pay for the expenses incurred.

As a result, your financial plan is bound to fail. Take the case of Amrita and Suresh. Amrita was a housewife while Suresh worked in an MNC. He had made a lot of investments in stocks, gold and realty. But he did not take an insurance policy. Then one day, Suresh met with an accident and died. His death left Amrita in bad shape financially as there was no insurance cover to claim compensation.

So if you don't want in Amrita and Suresh's shoes, you must take a suitable insurance cover.

But while selecting the insurance cover, you must choose the right sum assured. Taking higher sum assured than needed will mean you unnecessarily end up paying higher premium. Choose low sum assured and you will not get sufficient compensation when needed. Here are the main steps when deciding the right insurance cover for you.

Find out your requirements: Would you venture out shopping without a shopping list? Of course, not. Similarly when you are looking out for insurance it is important for you to identify our needs. Do you want only insurance or are you looking for a combination of investment and insurance?

Are you looking to get the facility of periodic withdrawals? If it is just insurance, opt for term insurance and other insurance products for a combination of investment and insurance. For periodic withdrawals, go for money-back policies. It will prevent you from choosing the wrong product.

Calculate the amount of life cover needed: After deciding on the type of insurance required, it is time to find out the amount of sum assured needed. If you are looking for pure insurance, i.e. without any investment option, you will have to take into account the future responsibilities and obligations, besides establishing an emergency fund to pay for any unexpected expenses.

But if it is an investment-based product, start by establishing the investment aim. Do you want to save for retirement or for buying a house? Once that is done, you have to decide a figure for the total corpus you expect your insurance product to provide for you.

Choose the right insurance advisor: The major problem plaguing the insurance industry is mis-selling. Due to high commissions involved in the selling the product, the insurance advisors tend to favour those products that provide them with the highest commission. So it is quite normal for insurance advisors to peddle investment-cum-insurance products over pure insurance products.

Also unlike a mutual fund advisor, an insurance advisor is tied to a particular insurance company. This means you are tied down only to the insurance company to which the advisor is affiliated. So you cannot compare across the products offered by various insurance companies and choose the best one for you.

The option here is to visit various insurance comparison websites that let you give a comparison of the various policies offered by different insurance companies. These websites are neutral, so you can expect to get unbiased advice.

Review your needs frequently: As you go through your life, your circumstances change. Your marital status changes, your income will vary, you will need to take care for your spouse and kids. So the life cover you have started with may not be enough to provide security for you and your dependents.

Similarly, if you have chosen an investment-cum-insurance plan, the investment plan may not work out as per your original estimate. Hence it is essential for you to conduct a regular review of your situation and decide if your present insurance cover is enough for your circumstances.

Insurance is a very crucial component of every investor's financial plan. Absence or inadequate insurance can throw the investor's financial plan out of gear. But at the same time, taking very high over will mean you end up paying more for the cover you don't need.

Hence, it is important to take right insurance cover for you. This can be done by establishing your needs, deciding the amount of sum assured, getting quotes for various insurance products from online insurance websites and reviewing your insurance requirements regularly.

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