Tuesday, December 22, 2009

Something About Insurance ...

Now a days, we are often annoyed by calls from various  insurance companies to buy this or that plans….
But How many of us  know what insurance really means? Not many going by the various plans that have been sold over the years. While different individuals plan their finances differently based on their needs and incomes, it is also true that all individuals need to have a term plan in their financial portfolio. Also other insurance plans can co-exist in your portfolio.

Any ways it can be defined in simple language as a protection against financial loss arising on the happening of an eventuality. For instance, In life insurance parlance, the event happens to be the death of an individual.

Basically there are 2 types of plans; endowment plans and term plans. All other plans are actually variations derived from these two.

In an endowment plan, the premium paid covers a savings element that is invested in different investment instruments to generate returns in the long-term.

A term plan, is a pure risk cover plan, only administration expenses and mortality charges are covered in the premium. There is no savings element in the premium being charged to the insured; as a result the insured does not receive anything should he survive the entire term.

Thus , the question now arise for which plan we should go for??? See the answer to this depends upon individual to individual..but in a broader way, for a lay man , Term insurance is advocated…The reasons are very clear.

• A term plan offers the insured a higher sum assured at a very low cost. And this is the fundamental principle of insurance. But in India, history suggests that insurance has always been sold, it has rarely been bought. Blame the unscrupulous insurance agents for this. To really understand this statement, one has to take a look at the agent’s commission structure of various plans.

• Premium paid on term plans is lower compared to the premiums on other plans

• Another reason for term plans being a more prudent option than other plans is its suitability to all individuals irrespective of their age, sex, earning capacity and lifestyle, and risk-taking ability. This plan is a necessity for all concerned as it offers maximum (cover) at minimum (premium).

• Ideally, a term plan should be taken for the maximum possible tenure available from the insurance company.

Lets have a peek on other side too,

People tend to ask, “What do I get back after paying my premium?” A reply that their family is protected against the financial loss due to an unlikely event of their sudden demise does not suffice.

That’s why penetration of term insurance plans are very very low in our country. Data reveals that only 26 per cent are insured in India. That too the average sum assured per policy is just over Rs 90,000. This is never going to be sufficient..
As observed , premium to sum assured ratio is high in India, because we rarely have term insurance policies. Invariably every policy holder expects a maturity value. This leave the insurers with no choice but to promote emdowment plans.

But as everybody says, endowment plans gives back a maturity benefit which is not the case with term assurance plans. That does not matter if you are really a smart investor..Isnt It...?

1 comment:

  1. Yes, Fully agreeing with the above statement..
    Insurance is not an investment to get returns on you money, this is to protect your family from sudden demise.
    One must not confuse between money back investments & insurance.
    To get money back on your investments you must go for mutual funds, with advise of a investment advisor.
    And well said above, avg insured amount is 90,000 per individual. what if one dies at any point of time, the family gets only 90,000?
    Is that enough for your family?
    One at least needs 50L and more for the same, which can be "bought" for just 800-1000 per month, having age 25 or so.
    So guys Term is always better option than Endowerment ( money back) policies