11

Health Insurance: Single Plan or a Family Floater Plan?

Hello fellow investors

With COVID-19, the one thing that everyone has realized is Health insurance is a must! We all need adequate Health Insurance cover and at a good price. Because whether to have Health Insurance or not is no longer a point of discussion. In fact, now we want to ensure that everyone in the family also has Health Insurance.

We have been asked many questions about whether you should opt for a stand-alone health plan or a family health plan; and whether to opt for a top-up plan afterwards. We are going to break down these concepts for you.


How much Insurance should you have?

Before getting into the discussion of what type of plan, it is important that you know how much insurance is enough for you. Ideally, if you live in a tier 2/3 city you must have a cover of at least 5 lakhs and if you are in a metro/tier 1 city you must have a cover of at least 10 lakhs. These are indicative numbers based on the cost of health incurred in different places and you can always take a higher cover.

 


What is an Individual Health Insurance policy?

In the case of individual cover, the policy provides specific health cover for each member covered in the policy. You can decide to have a higher cover for the working member and a smaller cover for the children. Each family member will have a dedicated sum assured under the policy.

For example, you can buy an Individual Health policy that gives a cover of INR 10 lakhs each to yourself and your spouse and INR 6 lakh for your elder kid aged 15 and INR 3 lakhs for your younger kid aged 10. The cover amount is specific to each person and not shared among the different members.


What is a family floater plan?

In the case of a family floater policy, all family members are covered in a single policy. Unlike individual policies where there is a dedicated sum assured, here there is a single “floater” sum assured which is shared between all members of the family. 

For example, if the family in the above example takes a family floater policy with a sum assured of INR 10 lakhs, all the four members of the family share the INR 10 lakhs sum assured. That means the insurer’s maximum liability towards the entire family for a particular year (irrespective of which individual gets hospitalized) stands at INR 10  lakhs.

Under the family floater policy, medical reimbursements can be availed by any or all of the members subject to the total sum Insured.

Let us compare the prices of family floater and individual policies to understand better:

Case 1 - A couple



Family floater plan premiums are determined based on the age of the older person. Given that this is a relatively younger couple, their premiums are not very different.


Case 2 - Parents with 2 children


In case 2, for older parents, there is a significantly higher premium being paid for a family floater plan. In case there is a predetermined illness that would further push the premium for the entire family. However, the 20 lakhs cover under the floater plan would be available to each family member thus increasing the cover amount at a higher premium.


However, where you have a cash crunch, you can go for a floater plan of 5 lakhs wherein the cover of 5 lakhs is available for all members with a reset clause for a cheaper price. You save around 10 K per annum in the premium costs where you go for a floater plan of 5 lakhs for the family. 

The reset clause: Family floater plans come with a reset clause that allows for a 100% reset of the sum insured once in a policy year. This option automatically comes into operation when the sum insured (including the accrued additional sum insured, if any) is already used by one insured person and hence is insufficient for the other. The reset of the policy happens only for an unrelated illness.

For example: In the case above if the husband is sick for malaria and makes a claim of 3 lakhs in a year and later wife gets admitted for a different health issue like blood pressure and has a hospital bill of 4 lakhs. The floater plan will cover it as it would have reset the sum assured. But if the wife is admitted for malaria itself and the bill is of 4 lakhs, only 2 lakhs (to the tune of the original sum assured of 5 lakhs less 3 lakhs claimed by husband) will be payable by the insurance company.

A Family floater policy is value for money and comes a bit cheaper compared to individual policies and that’s a plus especially for young families who are tight on budget for their insurance spending. 
 

No claim bonus: If you do not make any claims under the policy any year, a percentage of your sum insured, say 10%, is added each year to your sum assured. So if in 2019, I do not make any claims under my policy which has a sum assured of INR 5 lakhs, in 2020 when I renew it, my sum assured is increased to INR 5.5 lakhs without any increase in my premium amount. The negative of family floater plan that is that in case of a claim by even one member under a family floater, the entire No Claim Bonus (NCB) is nullified for the year under the policy whereas the same is not true for individual policies.



Top-Up Plan

A top-up plan is a regular health insurance policy that covers hospitalization costs but only after a threshold limit, known as a deductible, is crossed. A deductible is that portion of the claim amount that is not covered by the insurer and has to be paid by the policyholder before the benefits of the top-up policy can kick in.

A top-up plan, therefore, is a cost-effective way to increase your health insurance. You can take a base policy and a top-up over above that policy. This way you can use your base health insurance policy to make a claim up till the deductible amount and use your top-up plan for any payments over that.


Where you want to increase the sum assured of your policy, you can do that only when the policy is due. Top up gives you the option to increase the sum assured at a minimal cost during the year. Hence, Top-up helps you to increase the base sum assured amount for your insurance needs.

What should you do?

The health insurance that you would take would depend upon the age of the oldest member in your family, the number of members, and the premium you are comfortable paying for the same. It would be interesting to check various options and choose which one best suits your needs and pockets.

It is advisable to have separate health insurance for older people or those who are susceptible to illness/hospitalization. By doing that, you are protecting the no-claim bonus clause of the policy and also not paying a higher premium for other insurance.

Hope this helps you understand your insurance needs better.

Happy Investing!


Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.



7

Importance of Travel Insurance post COVID

Not many people realize this but travel-related insurance is easily one of the most ignored aspects of international travel and with the entire COVID-19 scenario running roughshod on international travel, it will become all the more important. This kind of insurance has always been very necessary to cover different kinds of travel-related risks like missed connecting flights, lost baggage, injury or illness abroad, loss of travel documents, loss or damages caused because of weather-related problems, etc. With the evolving Corona Virus situation, however, things will continue to remain exceptionally unpredictable for the foreseeable future, leading to any factors which will lead to increased need and importance of insurance for travel purposes.

 

Factor 1: The lingering risk of Corona Virus infection:

There will be a few long months, maybe more than a year, before you can expect an effective vaccine for coronavirus infection. News shows that while some medicines have shown promising preliminary results in the treatment of Covid-19, a vaccine is always the best choice because it is a preventive measure and as the old adage goes, prevention is always better than a cure. International travel takes place in planes which are enclosed environments and people are too close for comfort in the planes. Did you know that even if you fly business class, you are still not far enough from other people in a plane for sensible social distancing to be possible? Imagine flying coach in such a scenario! This means that ​travel ​insurance​ is going to be extremely necessary for everyone.

 

Factor 2: Airlines services will continue to be shaky

Airlines are trying very hard across the globe to keep their systems operational but the situation was at one time so bad that they were not even able to find enough parking spaces for all the grounded planes. The fact of the matter is that airlines always run at paper-thin margins because of the highly competitive industry and extremely volatile cost structure. Once they are going to get things in the air once more, there will be a lot of turbulence. Many systems were working by duct tape and hammer blows and getting back these systems to operational level in an understaffed and risk-bearing situation will mean many people will miss connections, luggage will get lost many times and all such risks will be very high, creating a strong need for everyone to buy travel insurance online before they fly to anywhere out of the country.

 

Factor 3: You might get stuck out of India during lock-down

Let there be an assumption that you were able to travel to any country out of India and you landed there all safe and sound, but just before you were supposed to travel back, your host area encountered a sudden rise in infections, making it necessary for the government of that area to suspend all travel activities in and out. In such a situation, you will be stuck in your host country until the government of India can arrange for your return. Travel insurance will be your only help in such a case. It will cover all your extra expenses which you will have to bear during the lockdown.

 

All things said and done, for the coming few months, international travel will change like never before.

8

What is travel insurance ?

With the increase in travel, one of the important things that travellers need to know about is Travel Insurance. This form of insurance helps cover a whole range of uncertainties and scenarios that can drain out a traveller’s finances. Most countries require mandatory Travel Insurance while applying for a visa. But choosing the right Travel Insurance which covers all the risks of travel is important.

 

What does Travel Insurance mean?

Travel Insurance is a type of insurance that covers different risks while travelling. It covers medical expenses, lost luggage, flight cancellations, and other losses that a traveller can incur while travelling.

Travel Insurance is usually taken from the day of travel till the time the traveller reaches back to India. Taking Travel Insurance ensures comprehensive coverage in case of any emergency in another country. Travel Insurance is also available for trips taken in the home country of the traveller like Bharat Bhraman & E-Travel, but it is a more popular option for travel abroad.

Some of the risks covered under Travel Insurance are:

  • Personal Accident Cover, which covers:
    • Insured’s Death
    • Permanent Total Disability
  • Accident & sickness medical expense reimbursement
  • Dental treatment relief
  • Emergency evacuation
  • Repatriation of remains in case of death
  • Baggage delay
  • Loss of checked baggage
  • Loss of passport
  • Flight delay
  • Hijack
  • Home burglary
  • Trip curtailment
  • Trip cancellation
  • Missed connection/missed departure
  • Bounced hotel/airline booking.

There may be more risks covered under individual policies depending on the requirements of the traveller. The amounts to which these risks are covered depends on the policy & plan that the traveller opts for. Travel Insurance also covers additional risks at an additional premium. Some of these risks are specific to the traveller or the place the person is travelling to.

 

Types of Travel Insurance:

There are single trip Travel Insurance policies meant for one journey. But for frequent travellers who travel abroad for business purposes, there is an option to buy a multi-trip Travel Insurance policy. Some policies last for an entire year and cover multiple trips to a particular destination. Opting for such policies is much more cost-effective for businessmen and frequent travellers to a particular destination. We also have student policies which are specially designed for students going abroad for studies at an affordable premium. The maximum trip length can last from 30, 45 and 60 days.

Another type of travel policy is a Group Travel Insurance policy. A group policy covers 7 or more travellers. These policies are cost-effective and offer similar benefits as single trip Travel Insurance policies. Group Travel Insurance policies are based on the age of the travellers which means it works out more cost-effective per traveller. Most travel companies opt for group Travel Insurance policies when they take groups across different countries on tours.

It is easy to pick out a policy once you know the Travel Insurance definition. While planning your trip abroad, pick out a Travel Insurance policy that provides exhaustive coverage with high coverage. It is possible to check the cost of Travel Insurance on insurance aggregators and pick out the best policy. HDFC Bank offers a variety of Travel Insurance policies through the bank’s website like Student Travel Insurance, Domestic, Senior Citizens, Family and even Individual Travel Insurance. You can easily pick out a policy that suits your need and provides the best value for money.

 

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Insurance is not Investment


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When you Invest your money, you part with your money today to get something in return tomorrow. whereas when you get insurance for something, you expect to get financially covered in case an unforeseen event for which insurance is taken occurs.

Thus, term insurance is a pure insurance product, it is not for your living but in case you die, you get the money. According to us, Term Insurance is the cheapest and best way to insure your life.

However, many people feel otherwise and believe that they want to put money in insurance only when they are guaranteed that they shall get something in return either alive or dead. In this bargain, you are just investing (with insurance as add on) but not getting adequate insurance for yourself.

We have already discussed, how a Term Insurance must replace you Financially and how to compute the amount of your sum assured in the article – how to compute your sum assured.

In spite of this many people believe otherwise and want to get returns for their insurance.

Let us understand the same with an example

If you spending INR 5000 for your insurance needs each month.

Case 1 – Where you buy a Life insurance product in which you get an amount on maturity where you do not die like a basic money back policy or an endowment plan. 

Particulars Amount
Premium Per Month              5,000
Premium Per Annum            60,000
Number of years covered under the policy                   30
Total Premium Paid        18,00,000
Sum Assured under this Policy        70,00,000
Amount received on maturity if the person survives        55,30,890

The Rate of Return, in this case, is 6.5%

Case 2 – When you buy a Term Insurance and invest the balance amount in a mutual fund.

ParticularsAmount
Term Insurance Premium per month                    850
Term Insurance Premium per annum               10,200
SIP premium amount                 4,150
Mutual Funds Investment per annum               49,800
No of years covered under insurance and investment                      30
Total Investment Amount           14,94,000
Sum assured under this policy           10,00,000
Amount received if you survive
Term Insurance                      –
Mutual Funds Investment        3,46,16,398

The Rate of Return, in this case, is 15%

Comparison between the  2 cases are as under:

Wealth Cafe actionable – This article is to give you an idea of how important and cheap term insurance is. Buying endowment plans for your insurance needs could be expensive. However, getting an endowment plan for a low-risk investment option could be considered by you for your investment needs. It is important to know the exact return % you are getting from these investments and then, take a decision.

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Have you planned for your parents, Girls !!


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Have you planned for your parents, Girls!!!

Let me be very honest, I was never an expert on estate planning or retirement planning. My financial planning expertise was dealing with new bees like me. For my workshops, I started reading a lot and I found this very interesting article that Harsh had preserved since 2009 on Estate Planning, It quoted as under:

“According to Hindu Succession Act, if a Hindu male dies intestate (without making a will), the property is first passed to class 1 heir which include the deceased person’s widow, children, and mother in equal share.” I thought this is pretty fair, the mother, wife and children can all manage easily after the death of the son, everyone is given a good equal standing.

It continues “However, in cases where the ownership is in the name of a woman, her husband and children become equal shareholders of the inherited property upon her death. In cases, where none of them are present, the property can be claimed by her husband’s heir.”

Before I write further about my feelings and research on this topic, please note the following:

  1. I am not a Femi Nazi, I definitely believe in equal opportunities if not equal rights.
  2. We are 2 daughters in the family (i.e. no male sibling to take care of my parents after us).
  3. I have earned and built a decent portfolio of my own before my marriage and my husband’s involvement (and so has he). We both have an individual financially independent life.
  4. All the views are my personal, I am stating laws and its interpretation as per my understanding, I do not wish to ruin anyone’s marriage or any other relationship.

As you may understand, I was pretty shocked by the above language of the law quoted in the article and with very high hopes started researching on HSA has to know more about the inheritance of women’s property in today’s time.

There has been an amendment in HSA, which now states that, property of a female Hindu dying intestate shall devolve on the following persons:

Firstly, upon the sons and daughters (including the children of any pre-deceased son or daughter) and the husband;

(b) Secondly, upon the heirs of the husband;

(c) Thirdly, upon the mother and father;

(d) Fourthly, upon the heirs of the father; and

(e) Lastly, upon the heirs of the mother.

So the law means that if I die (a married woman with some property of her own), without making a will, firstly my property will go to my children. Currently, I have none, so the property will go to my husband. If me and my husband both die, then it shall go to my husbands’ heir (i.e. his parents) and if they are also not there, then it shall go to my parents.

Hence, my parents have the right to my property after my children, my husband and my husband’s heirs.

After knowing this law, I am personally noting down my own will or a plan in case anything happens to me intestate.

  • Some may say, I have an insurance, why do I need to put a will, intestate property includes my insurance money as well. So I have nominated and put my parents as the receiver of my life insurance on my death.
  • I have made a list of assets I acquired pre-marriage and have nominated, appointed my mother and father as the joint holder of the same. I might actually pen down a will very soon.
  • All the assets that I am acquiring post my marriage, is to split in the ratio of 60:40, with 60% devolving with my parents and 40% with my husband and his family.

These are just a few points that I am doing to ensure my responsibilities towards my parents are fulfilled financially even after my death and that my husband is under no pressure to take care of anyone.

Some people may still believe that I am being a feminist and this law may work against the hard work and efforts a husband and his family put on the wife to help her build her own assets. I do not wish to undermine any effort put by the family as a whole. It is very important to know what the law states about the right of a woman. Each situation and a family relationship has to be viewed and analyzed separately before a will is made.

Times have definitely changed and from owning a house to building wealth, the female has an equal stand in both her families and she is equally responsible to her both set of parents. Until girls with no male siblings take steps like these to ensure that their parents are self-sufficient, no parents would kill to have a male child.

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Insurance Frauds and Spurious calls


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A friend was duped into buying a Private Company’s life insurance policy when she had just started to work with her first employer. Being new to tax planning, she was sold the policy stating that payment of INR 50,000 per annum for the next 7 years will get her INR 1,000,000 at the end of 15 years.

The friend got a call on her landline asking for her insurance needs. Her mother gave her mobile number to the insurance agent and asked her to coordinate with him. She was so occupied at work that she bought whatever insurance he sold to her convincing her that the investment would double in 7 years and the insurance will also give her tax benefits.

When any salaried individual hears – ‘Tax benefit’, they jump into that investment without really thinking if this is going to give any actual tax benefit.

We have in detail discussed in our Article – Why you must buy a term Insurance and mutual funds av/s a general endowment plan. The article explains with examples how a commonly bought insurance from any insurance companies does not give a return of more than 6%. Whereas a mutual fund gives you a return of 9-15%.

I went with my friend to surrender the policy at the HDFC Insurance office and was surprised to see that around 10 people were waiting to surrender their insurance policy on a Friday afternoon.

Why are the policies missold

The Insurance agents get a commission ranging from 40% to 70% on the premium amount paid towards insurance making insurance the most marketed financial product in the world.

This commission is just not for the first year premium. In some cases, they get it for the first 3 years 40% and balance 3 years 20%.

The high commission makes insurance a very lucrative product to sell.

New ways of mis-selling

The case of misselling has worsened since people have started getting spurious calls in the name of regulatory organizations and government or quasi-government authorities. Recently some gangs have been exposed to a new scam of the Insurance Sector “Fake calls from IRDA”.

This scam is to trap the existing policyholders who are not satisfied with their existing plan and are not getting desired returns, bonus or claims.

  • They get calls from people pretending to be representatives of IRDA.
  • They claim that this call is on behalf of IRDA to address the complaints and grievances of the policyholder.
  • The person receiving such a phone call gets convinced and starts sharing the problems faced with the existing insurance policy.
  • On understanding the issue of the policyholders, these tele-callers convince that they will get the refund of the existing policy and the policyholder can withdraw the actual amount of the premium paid to the company.
  • These callers, the fake IRDA representatives, keep complete knowledge about the functioning of insurance companies, regulatory authority, and norms and then they make the other person convinced confidently and smartly with their conversation.

I have also received calls from IRDA asking if I had any issues or I should own a good insurance product. They are regulatory bodies and hence, it is very easy for people to believe them.

When I told them to send me an email, they started abusing me over the phone and spoke in a very disgusting manner. I immediately knew that they are imposters and cut the call.

How can you protect yourself from such spurious calls?

  1. Do not entertain any insurance provider over a phone call; always ask them to drop an email from their official email ID, providing you the offer and other details.
  2. It is very important to educate your parents about the same. It is very easy to obtain the landline numbers and sell the same to housewives with little or no knowledge about these calls. They end up giving their debit card/credit card pins.
  3. Report all the telephone numbers when you receive a call from one, claiming to be a fake LIC agent or the IRDA regulators.
  4. IRDA has issued a public notice to state that the regulator (i.e IRDA) never makes any calls. “The general public is hereby informed that the Insurance Regulatory and Development Authority is a regulatory body which does not involve directly or through any representative in a sale of any kind of insurance or financial products,” a public notice posted on its website said. It further adds that if you make any kind of transaction with such a fake agent, you would be doing so at your own risk.
  5. Likewise, if you receive calls from an agent claiming to be from LIC or any other insurance company for that matter, it’s best to disconnect the call.
  6. If an agent asks you to pay cash, it should be an immediate red flag. According to LIC’s advertisement, when you buy an LIC policy, you should register the same on their portal for easier management of the policy.
  7. When an agent visits you, you should check his/her license, issued by the insurance company. But, then, we think it isn’t too difficult for fraudsters to make fake license. So, maybe paying a visit to the insurers’ branch office or buying a policy online via the company’s website or online insurance portal, would work better.
  8. Register your policies online on the websites and other private insurers to avoid any communication with an agent. You can coordinate with the insurance providers over emails.
  9. Make use of 15 days /30 days free-look period and read all the policy documents after you have received the same.

These are basic solutions and common sense ways to deal with the problem of spurious calls. However, as many of us are too occupied with work and other commitments, we do not spend too much time to sort our investments becoming prey to such scams.

It is your hard earned money which is being invested in various financial products and hence, you must be cautious on how you manage the same.

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6 things to note before buying a Health Insurance


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Health Insurance is one of the most important insurance products to own. In fact, it is a mandatory financial product to own after a term insurance to achieve your financial well-being.

We have listed below the things to note before buying a health insurance.

1) Decide the Sum Insured from the Long-Term perspective

The biggest mistake one makes when buying Health Insurance, is consider the expenses that you may incur today. However, in reality, health insurance is bought for 20-25 years from now.

Hospitalization costs today would be ranging from 50,000 INR to 300,000 INR. Assuming you are 30 today, at an modest average healthcare inflation of 7.5% for the next 20 years, single hospitalization bills will range at around Rs. 13 Lakhs when you are 50 years old.

It is very important to think in long-term while deciding the cover of the policy and hence, you must take a higher cover.

2) Know about the things that you must ignore and consider.

There are many features in a health insurance policy. You must have read the same in the insurance brochures and pamphlets. It is important to be able to distinguish between the features that must be considered versus the add-on features which should not be your deciding factor.

Features like Ambulance, Daily Hospital Cash, Domiciliary, and any other benefits that don’t get used often, have low consequences in your health planning. These should be overlooked so that you could focus on the main features like the network of hospital, fees for doctor consultation, Room rent Limit, ICU charges. Check if they are paying for medicines or not and these kinds of expenses which make the major part of your overall bill.

Things like Ambulance charges are not more than Rs 2,000 , if you have to pay it from your own pocket, even that its totally fine. Why choose a policy based on this feature? Its always a bonus advantage and nothing else.

3) Know about the Sub limits in your health insurance.

Many Health Insurance policies have room rent capping, which means you are eligible to claim expenses of the room renting up to the decided cap limit. In case you opt for a room above this cap, you will have to bear the additional proportionate expenses on your own. Let me give you an example

Lets say, as per your policy you are room rent limit is Rs 4,000 per day . Now if you get hospitalized and you choose a room which has room rent of Rs 10,000 . You might think that you will just get 4,000 per day for room rent from the insurance company and other charges you will get as per the limit. But thats not true.

Other hospital expenses such as doctor’s consulting fees, medicines, reports, scanning fees etc are also dependent upon the room that you opt for. If you select a room which is higher than the room cap set. The expenses based on the room rent cap will be reimbursed not on an actual basis but based on the cap set. Other expenses are also proportionate to the room capping

Hence, your preference of health insurance should be in the following order:

  • Policies with Private Room eligibility.
  • Policies with No Room Rent capping.
  • Policies with Room Rent capping.

4) Check for the cost-sharing issue or the co-pay

Many private health insurance companies have a co-pay policy where you have to bear 10%-20% of your health bills. With a big surgery or a huge expense, this amount can also be huge and you may not be in a position to bear it when the time comes. Hence, ensure that all the major expenses of your health bill are covered in your insurance.

5) Tax deduction under section 80 DD of the Act

Ensure that your children, spouse, and parents are also covered by an appropriate health insurance. Anyone can suffer from any health issue and insuring them will reduce your personal financial burden. The benefits of getting your family covered do not end at the level of security rather it offers great tax benefits as anyone paying premiums for parents, apart from themselves, spouse and children, they can claim deductions up to INR 55,000, according to Section 80D.

6) Don’t be late in buying a health insurance

We always advise that term insurance and health insurance should be bought at the earliest possible. These financial products are obtained when you are in good health and young age to reduce the cost of them, After you have developed any health issue it will be very difficult to obtain a health insurance policy which without co-pay criteria.

 

 

 

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Should you switch from the traditional endowment plan to a mutual fund?


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In spite of being a financial planner and helping people invest and understand investments, it took me a long time to convince my husband to stop paying his endowment plan and invest the equal amount in the term-insurance and good equity oriented mutual fund.

It is just not him, 9 out of 10 people own an endowment insurance plan rather than a term insurance plan. The only reason for the same is to get their invested money in return.

Further, even after knowing that the endowment plan is not a wise investment choice, they are not convinced to surrender the insurance policy because they do not want to bear the loss on surrender.

We have tried to make your decision of switching much easier by calculating the actual loss that you might incur on surrendering the insurance policy versus the benefit of investing the premium amounts in the mutual funds.

To make it easier for you, I have tabulated below the gains that one would receive in both the scenarios to help you take a smart decision.

Scenario 1 – You continue to invest in the endowment plans such as Jeevan Labh or Jeevan Anand from LIC. (this is purely for an example purpose)

Total Premium over 35                           8,40,700
Maturity value after 35 years                        12,20,000
Total Gains from Insurance                           3,79,300
CAGR1.1%

Scenario 2 – You withdraw the insurance premium amount and invest the same into mutual funds. You would also incur an additional cost of buying a term Insurance which would give you a cover of 1 Crore for INR 1200 per month.

Total Investments     8,13,551
Value at the end of the term  41,06,447
Total Gains from Mutual Funds   32,92,896
CAGR5.5%

For detailed working of the above 2 tables and how we arrived at those numbers, refer to surrender of an endowment plan vs investing in mutual funds (working).

We have attached the excel sheet here for your own calculation. Just change the numbers in the boxes highlighted in pink, the sheet would compute the gains value and CAGR in each scenario. The same shall help you take a decision of whether you should stay invested in an endowment plan or move out your money and invest in an equity mutual fund.

These decisions are very case specific and factors such as risk-taking ability play a huge rule in deciding the movement. Never forget the following base rules before making the switch:

  • Understand your risk taking capacity.
  • An equity mutual fund is very volatile in short-term, investments in them are made from a long-term goal of 10+ years for the best results.
  • Where you cannot bear the risk, it is best to consult your financial advisor, who shall guide you in the same.

This transition is easier and profitable in the first few years of insurance premium has been paid. If you plan to move after 10-12 years of paying insurance premium it will generally not be profitable. The premium amount lost on surrendering the policy would be higher as compared to what you can receive in the balance tenure in mutual fund investments.

Please note the assumptions and explanations provided in the excel sheet for the computation of gain numbers and do your analysis accordingly.

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Why should I buy a term Insurance, even when I am not getting anything in return


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I bought my first life insurance which was an endowment plan with a premium of INR 36,000 per annum. I had this very trusted, family Insurance uncle, who helped me buy the so-called life insurance. I believed that buying this insurance was a right investment decision and I just made everyone financially secure in my family.

The Policy was as under:

Type of PolicyEndowment Plan
Premium Per annum36,000
Total Period of Policy15 years
Amount Paid for 15 years540,000
On Maturity810,000
Gains made270,000
Gains in %5%
On Death2,000,000

 

Like most of us, I did not calculate the exact return I would get from the policy. I had to invest only INR 3000 per month and it gave me a life cover of around 20 Lakhs.

Eventually, as I started reading about financial planning and Insurance I had the following questions in my mind.

  • If I die after 15 years, my policy will expire within 15 years and then I will not get any death benefit. Hence, is it enough to hold a policy for 15 years?
  • On my death, my dependents would only get INR 20 Lakhs, is that amount enough for them?
  • Won’t I have more dependents as I get older, spouse, children and parents? Will this one life insurance policy enough?
  • The biggest question of all was, if I invest this INR 36,000 into any mutual fund for the next 15 years, I would get a return of 8 – 12% as compared to the return of 5% in this endowment plan. Why should I invest in endowment plan?

The obvious answer was to let go this endowment plan and obtain a term insurance which would cater to all of my insurance needs. I spoke to my very trusted insurance uncle.

He told me why I need a term Insurance; I will not get anything in return. It is all your premium amount wasted.

I was confused; I tried explaining him the mutual funds v/s endowment plan concept. He was just not ready to sell me a term insurance. I had by then done enough reading to know why term insurance is better and I must own it.

Brief of my term Insurance plan

Type of PolicyTerm Plan
Premium Per annum7,000
Total Period of Policy35 years
Amount Paid for 15 years245,000
On Death1,00,00,000 (1 crore)
Gains madeDependent’s future
Gains in %Dependent’s future
On Maturity (if you survive)Nil

 

Here are my reasons for the same:

  1. Term Insurance is a pure life insurance product. It means if you die during the policy period, then your nominee will receive the entire sum assured.
  2. If you survive till the end of the policy period, then you will not receive any maturity amount, the premium paid is very minimum and it’s the cost that you incur to insure your own life and secure your family’s future.
  3. The policy costs you very less and covers a large amount of life risk. I have a policy with a cover of 1 crore and I pay a premium of 583 per month (lesser than my travel expenses per month) On my death, my financial dependent, whom I nominate, shall receive the life cover amount. However, it is very important to get the term insurance of the right amount. We have discussed the same in Points to note before while buying term insurance.
  4. If you think, you will never have anyone who will be financially dependent on you in the future (in case you do not have anyone now), you must definitely revisit this thought. Finances and money are one of the most unpredictable subjects and the best is to insure such volatility. Term Insurance if bought at the right age will cost you less and can be obtained without any medical tests.  We have discussed the same in  Points to note while buying a term insurance.
  5. It covers the FINANCIAL RISK OF YOUR LIFE.
  6. However, nowadays there are so many variants in Term Life Insurance. For example, the return of premium, Term Life Insurance up to 100 years of age and many other riders. If you do not want any financial hassles for your dependents, stick to simpler financial products.
  7. It is super easy to buy the term insurance online. Refer our Article –Myth about buying term insurance online.
  8. The brokerage that agents get on term insurance is also low and thus, they do not sell it as much as the other insurance products.

An honest financial advisor will always ask people to first own a term insurance before advising on other investment products. If your financial advisor is telling you not to buy the term insurance or is against it, you should revisit the same.



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