These days I’m seeing an eye-catching advertisement on Television that you should check the returns of your Insurance before buying the policy. It made me both laugh and cry at the same time. I laughed because they are actually fooling the viewers by telling them to compare returns of Insurance policies. And, I cried thinking of all the people who after seeing the advertisement will actually go ahead with buying an insurance policy for returns.
Even if you look at Dictionary, it clearly says, ‘Insurance is an arrangement by which a Company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified period.’ Yes, you read it right, there is no mention of the word “RETURN” in the definition. Then why are we all hell bound to look for returns in a product which best functions as a risk cover.
Insurance should never be taken from the perspective of gaining returns. It is like you are paying premium for getting returns on the premium and not risk cover. There are insurance policies available in the market which give returns on the premium paid, but for those policies either the premium would be high or the cover would be too less. To buy the right insurance plan, you should first know how much of cover you need depending upon parameters such as your expenses, your liabilities, your assets, your family goals, etc. Once you know the amount of life cover required, only then you can choose the policy with least premium and high claim ratio.
There are two ways in which you can calculate the amount of life cover required by you – Income Replacement method or Expense Replacement method.
In income replacement method, total income of an individual which he is expected to earn over the remainder of his working life is calculated in present terms. Important parameters such as non-negotiable goals, outstanding liabilities, family assets, etc. are also taken into consideration. After factoring in all these details, the cover which an individual requires is calculated.
In expense replacement method, as the name suggests, total family expenses till the time of individual’s working life is calculate in present terms. Again, parameters such as non-negotiable goals, outstanding liabilities, family assets, etc. are taken into consideration. After factoring in all these details, the cover which an individual requires is calculated.
Financial Planners use any of these methods to come at the required life insurance need of an individual. Once this need is defined, an insurance policy should be chosen depending upon the quantum of premium and Company’s Claim history.
Hope this helps you choose an insurance policy with the right need in mind. And, when next time you see such advertisement on the television, you choose to ignore it rather than looking for returns in an insurance policy.
Charu Hastir, CFPCM is founder of http://www.theriteplan.com/. Rite plan is an online financial planning portal created to achieve a single objective of providing easy and Do It Yourself Financial Planning to netizens. Rite Plan is wholly owned by Tikkun Olam Financial Planning Services LLP. Please visit: https://theriteplan.com/index.php?route=common/home/