Insurance – You pay to cover for the Risk. Not for a Return.

Insurance – You pay to cover for the Risk. Not for a Return.

Ask a prudent financial advisor about the things that can guarantee some financial security in the event of life’s uncertainty, and he would blurt out the phrases Term Insurance and Medical Insurance, loud and clear!  Well there are no other opinions on this one, especially when it comes to giving the family of the common man; the salaried class and the sole bread winner of the family – Financial Security.

The Indian family structure leans a lot towards the single bread – winner style although times are now changing as we see a steep increase in the earning status of the women in the family. If it is ‘risk’ that we mean to protect ourselves against, then the conventional Life Insurance policy or the Term Insurance policy is the one to opt for.

A Term Insurance policy guarantees a pay-out to the beneficiaries, if the insured dies during the specified term. Let us assume, that if Mr. Subramaniam took a term insurance policy for a sum assured of INR 72,00,000/- he will just pay a single premium of a little over INR 5,00,000/- for a 21 year tenure. Please remember that Mr. Subramaniam is insuring his life and the event of his death any time during the 21 year tenure would have the insurance company pay his beneficiaries an amount of INR 72,00,000/-  Mr. Subramaniam will not receive any pay – out if he survives the term. (Note that the premium and sum assured are calculated based on the individual’s current earnings and age which is the standard norm for all term insurance policies)

It’s that simple. It is the most effective and cheapest life cover that salvages the loss of income if the bread – winner or the earning member of the family dies prematurely.

Why is a Term Insurance essential?

If you think “I won’t get anything back if I take a term Insurance” you’ve completely misunderstood the very purpose of Term Insurance. Well, if you want to get something back while you are alive it is clearly an investment from which you are expecting returns. Like the whole life insurance plan where you get an assured sum with a significant interest along with a death benefit. But expect to pay a premium way higher than that of a Term Insurance.

A Term Insurance premium is the cheapest because you are securing the future of your family against an evitable risk and there are no returns if the risk does not occur during the term. Buying a term insurance makes sense only when an individual is in the prime or working years of his/her life as the family would find it difficult to replace the lost income. Moreover, term insurance premiums are also eligible for an income tax exemption under Sec 80 [c] and Sec [10] of the Income tax Act of 1961.

Health at Risk is Wealth at Risk

If ‘life’ is a risk, ‘health’ too poses an equal amount of risk. An accident or illness can paralyze the earning capacity of an individual. This will also lead to an increase in healthcare expenditure. Archana is a single mother with a 10 year old son and a 55 year old mother. She works as a receptionist in a leading telecom company. Her company is generous on benefits and she has a medi – claim policy which covers hospitalization expenses in the event of an unforeseen illness or accident. This benefit extends to her dependents too and she has her mother and her son listed as dependents.

Archana’s mother accidentally fractured her leg while climbing down the stairs. She was admitted in the hospital for two weeks and is now home but with almost zero mobility. Archana is struggling with her mother’s OPD care, medicine supplies and assistance care and it was then that she realized she could have signed up for the Extra Care Health Insurance package from a representative who approached her almost a year ago.

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Rising healthcare expenses leave us with no choice but to opt for additional Medical Insurance. Managing healthcare expenditure during times like that of Archana’s is a herculean task especially when she is the sole earning member of the family.  A Medical Insurance Policy is a must and should be based on the health profile of the family and the earning capacity of the family. Archana’s financial condition could have been worse if not for the Hospitalization benefit she receives from her company.

Both loss to life and loss of health due to illness or accidents are inevitable and covering ourselves adequately through insurance policies are the wisest decisions we can make. All that we need to understand about these policies are their very purpose and how they would prove useful to us during the time of crisis.

While a term insurance premium is calculated based on your current income, age and tobacco habits a prudent financial advisor will do a careful assessment of your earnings, financial responsibilities and risk profile before suggesting the right medical insurance for you.

This article has been contributed by K.N. Sridharan, CEO WinRich