Insure Yourself and Your Property

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Series: Beginning Investing (7th post)
Section: Before You Invest
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Today's discussion will be on the next important thing to tackle before you start investing - Insurance.

Generally speaking, most of us equate insurance with savings, treating it as an investment mechanism. This midset is reinforced by the tax rebates we get on insurance, encouraging everyone to invest more and more in high-premia endowment plans every year in order to avail of the tax benefit.

However, the main purpose of insurance is to mitigate risk - risk of death (life insurance), risk of loss (general insurance), risk of illness (medical insurnace) or risk of untoward incidents while travelling (travel insurance).

As an individual, and a responsible householder, you should cover all of these risks when you plan your insurance, rather than rushing off to purchase more life insurance just because you get a tax break!

How Much Insurance Do You Need?

This is a fairly straight-forward question to answer:

• Life Insurance: The conventional approach is to insure yourself for an amount equal to about 10 times your annual income, which is a truly staggering sum! However, I believe this is a better way of looking at it. I also subscribe to the concept of layering your insurance plans so that you can increase your insurance amount over time till a point, after which it starts to reduce because you have saved a good amount by then and might not need so much insurance
• General Insurance: Insure your house (an option that generally is offered with many home loans nowadays - go for it) and your valuables. Burglaries and other mihaps happen and you'll sleep much better knowing that you have a fallback option. There'n no reason for you to learn this the hard way as general insurance premia are really low and definitely well worth the benefit!
• Medical Insurance: In general, try to get yourself and your family covered for major illnesses and surgeries. Some banks, such as Andhra Bank, offer a floating cover that can be shared by the entire family, which I think is a very useful facility as it saves the trouble and expense of insuring each family member independently
• Travel Insurance: This is a must while travelling. If you are abroad and things get stolen, your personal funds will not really help much, I can tell you!

A Bit on Life Insurance

There are two basic kinds of life insurance policies: endowment, wherin it is a risk cover cum saving scheme (this includes money-back policies, unit-linked insurance etc) and term assurance , which is a pure risk cover. The returns on your investment in the former are generally worse than you can do with other comparable investments in the market so I'd always recommend term assurance as the best form of life insurance. It has the added advantage of having very low premia because you need not invest anything in savings. However, due to its nature, the entire premium is an expense. Once you pay it, it is gone and you will not get it back unlike in an endowment policy.

Next Post on Beginning Investing: Set Aside Emergency Cash