This is further to my post on Insurance v/s Investments
A friend pointed me to this question posed at BimaWorld: Should one mix up insurance with investment? why yes and why no”. If I have INR 1,00,000 per year for investment, insurance and other savings how should I balance my investment and insurance.
Insurance and Investments are two different things. Insurance depends on your economic value to your family. Investments depend on your surplus income and your financial goals. So, to my mind, mixing up the two is misleading.
But in India, this mix up is common place. So even though the question asked may be misleading, it really begs for an answer!
So if I have Rs 100000/- with me, I would first figure out the amount of cover that I require. I will take my annual income, multiply it with 8*, add liabilities and reduce assets to arrive at the figure.
Let’s take an example: Annual Income: Rs 5 lacs, Assets: Rs 10 lacs, Liabilities:Rs 5 lacs. So my approximate cover would be 5*8+5-10 = Rs 35 lacs.
*There are a lot of variations in calculation of the insurance cover by the Insurance companies. Multiplying the annual income is the most debated one. I use 8 years because I feel that this is enough for my family to start generating income on their own after a gap of 8 years.
Some Insurance Companies recommend multiplying the annual income by 18-20 times! There would be a real hazard of doing away with the spouse!!
Now for an Insurance cover of Rs 35 lacs, there would be a range of products that could cost you from approx. Rs 10-15000/- to over Rs 1 lac.
I would recommend taking a term insurance cover for Rs 35 lacs paying a term premium of Rs 10-15000/- and invest the balance in low cost Mutual Funds/ETFs.
But I would also recommend checking out your risk profile and learning the relevant asset allocation rules before you go on to invest your money.
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(Hi,this theme looks greater than the previous one)
Term insurance is Good !!!
But….
I ve suggested term policy to some of my friends … but they were reluctant to buy term policy simply because it doesn’t gives back money if he/she survives the policy term.
Instead they were happy in buying ULIP’s , MoneyBack Guarantee – since it gives their money back – even though these products are HIGHLY COSTLIER than TERM INSURANCE !!!
“If we do something we need to get back something” – otherwise we wont believe in the system
Its the way we humans are brought up…
But my strong advice to everyone – Please go for TERM INSURANCE – because
1) when you live you can spend more money with your family – since you are investing less in term insurance.
2)Even if you die, your family will get back insured money and without your presence they can manage their lives financially to a certain point.
Whats up ???
Go and buy a TERM INSURANCE !!!!
@jayarajvmba
Even if they get back the money from term insurance , its wont be of great help .. Read this : http://www.jagoinvestor.com/2009/08/why-people-dont-like-term-insurance-and.html
Manish
What we meant was, we get a lot of queries like “When I am getting insurance and investment together (They refer to some ulip plans) then why should should we investment and insurance differently” ….
We have explained ulip life cycle at http://www.bimaworld.com/edu/ulip-plan-life-cycle.html (graphics is not good though )
Very well explained. Thanks for the simple explanation Mr. Varma.
I do agree that Indian masses mixes investment and insurance, which should not be done.
Investment given return but insurance financial protection against life contingency – early death or long living. Therefore, some return is also required hence the insurance policies had plans with return features, widely accepted by the masses all over including Indians.
Term insurance, no doubt is a risk bearing product but covers only one person at a time.
Whereas, joint life policy is a beautiful plan which provides risk cover for both husband and wife in a single policy.
In case of natural death: if one out of two sole mate departs during the policy period- a. full sum assured is paid to the surviving spouse.
b. Further Premium payment are stopped .
C. policy continues.
D. on maturity – Full sum assured once again is paid along with bonus for the full term is paid to the surviving spouse.
E. in case the surviving spouse also departs during the policy period.the sum assured is once again paid to the nominee along with bonus till the period the last spouse was alive.
F. In case of accidental death the claim paid is doubled the sum assured amount.
Like wise, there are several other plans with unique features, only one need to figure out and work the contingencies which could affect ones financial standing during his lfe span and after his life.
Gr8 to note the valuable comments. After reading it now, i can make-out very clearly that insurance and investment are two different aspects and should not be clubbed.
Specially people thing about their death but forget what will happen if they live long.
Long living requires more planning then non-existence.
Medical expenses, Social obligations, daily needs and respectful family life created the need for pension policies and return oriented plans.
Moreover, even today term assurance policy with return of premium feature must be in the market, if one is looking for.
The discussion looks good!
@jayarajvmba Thanks for liking the theme. I wanted a clean look and a bit of green (we r talking abt money!)
@Manish Thanks.
@Neha As I said, even though it is a wrong question, it really begs for an answer!
@Devanand It’s good to explore other options. A joint life policy for a 30-35 yr old would cost Rs 6000 for Rs 1 lac. So for a Rs 35 lac cover, you need to pay Rs 2 lacs as premium!
I would again like the process of getting an insurance cover to start with evaluating the cover required by you. And then decide what products would suit you. If yopu give preference to the choice of product first, the bigger question of how much insurance you need, remains unanswered!
@Amit The risk of living too long would become a bigger risk than the risk of dying early! The NPS is a good step for that.
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