It is ironical to note that we take vehicle insurance before we use our newly bought car on road but whereas we care little to take any insurance for ourselves. For instance, if the car is Hyundai-i10, the annual premium that we need to pay would be around Rs.18,000/- and if it is Maruti-800, the annual premium would be around Rs.8,000/.
Many of us ignore personal insurance and fail to understand how our family members would be forced to suffer in the absence of any compensation in case of any unavoidable eventuality for us. We take vehicle insurance because of two factors, viz. a) it is compulsory and b) insurance cover will fetch us due compensation in case of loss or damage. Equally or even more important is our personal life that must be insured so that our dependents would not be at least financially hit when a misfortune happens to us. Hence a term insurance is a ‘must’ for an individual.
We must take term insurance equivalent to10 to 20 times of current annual earnings. For instance, if our annual income is Rs.5 L, we must take term insurance cover for an amount of Rs.50 L to Rs.1 cr.
Majority of us take Endowment Insurance Plan as we will be able to get back what we initially invest with a rate of interest of 4% to 6% only. A person with 30 years of age will be required to pay a minimum premium of Rs.25,000/- per year for a cover of Rs.5 L. At the same time, if he takes a term insurance policy, he will be required to pay a premium amount of Rs.3,538/- only per year and he will get a cover of Rs.25 L in effect. Under term insurance, the premium is comparatively less with higher coverage.
If a person invests the balance amount after paying the term insurance premium on mutual fund, he will get a sum of Rs.17,31,956/- after 10 years as per the above Table 1. If one takes an endowment policy and happens to die within 5 years, his family will get a compensation of Rs.5 L only. At the same time, if he invests in term insurance and MF, his family will get a compensation of Rs.26.5 L. Still, if the policy holder does not want to take any risk and invests the remaining amount in PPF, his family will receive a sum of Rs.26.35 L as compensation
Hence, it goes without saying that Term Insurance scheme and investment in Mutual Fund or with Public Provident Fund is better than the Endowment Policy. Depending upon the degree of risk that one could invest either in mutual fund or PPF. If one wishes to take a higher risk Mutual fund is better and if one doesnot want to take risk, PPF is suggested.
Some may have a doubt whether the term plan with return of premium is good or not due to the absence of maturity value. The premium amount payable on these policies will be comparatively more than the ordinary term policies. Under these policies, the excess amount of premium will be invested in order to ensure that the maturity value is equivalent to the premium amount. At the time of maturity of the policy, the total premium so far remitted, will be paid back to the insured.
For example, if a person of 30 years insures for a sum of Rs.25 L for a period of 20 years, the premium payable is assumed around Rs.13,287/- per year. In the event of eventuality, the entire sum of Rs. 25 L will be given to the family. In case the individual is alive at the time of maturity, he will be given the premium amount paid by him to the tune of Rs.2,65,740/- as maturity value (as per Table 2). Therefore, Pure Term Insurance Plan is better than both Endowment Insurance and Term Insurance with return of premium as evident from Maturity value mentioned in Table 1.
It would be wise to observe the following points before we go in for this pure term plan policy:-
Background of the selected insurance company and the duration of its existence in the market
Selection should be made based on the calculation of 3 years’ claim settlements ratio made by the company previously. The higher the claim settlement ratio, it is better.
The number of branches of the insurance company and its quality of customer service is to be studied
Last but not the least is that while the premium amount payable in one insurance company will be different from others, we must necessarily look into the above-mentioned other factors before we decide the particular insurance company.
The above insights are highly valuable for the prudent investors.
(This article written in Tamil by S.Sridharan, Financial Advisor for Naanayam Vikatan magazine dt 10/12/2017 has been reproduced in English by P.S.Ramamurthy)