The moment
you talk about “Insurance”, everybody raise their eyebrows and look at you, as
if you are an insurance agent who is selling policies and earning commission
for a living.
And I am
sure; you will agree that when we see a person wearing a tie with a file in his
hands, we somehow manage to predict that he is coming to sell more insurance
plans to us and we better find an escape. Those who get trapped, they end up
contributing more to his financial goals rather than their own.
The person buying insurance has to
rely on agent to select a policy, which they think will solve their problems,
but most of the times, they end up solving his financial problem than their
own, by paying more insurance premium than required.
Insurance is
much ignored and misunderstood subject. The basic misconception is that
people think, it is “an investment”, this is where the problem is.
Insurance is “Not an
investment”, but it is more of Protection.
To be more
precise, it is financial protection.
I decided to
write on this topic, when I figured out that one of friend is actually paying higher
insurance premium for lesser sum assured.
What is Sum assured ?
The sum assured is the amount of money an
insurance policy guarantees to pay up before any bonuses are added. In other
words, sum assured is the guaranteed amount the policyholder
will receive. This is also known as the cover or the coverage amount and is the
total amount for which an individual is insured.
Well, you will come across this definition, if you search the
web. It seems very easy to understand what is sum assured, but it is difficult
to decide …..Right?
We are going to give you a simple formula to let you decide,
“How much sum assured you need in order to secure your life against
uncertainties.
Inflow and outflow
First of all, look at inflow and outflow of your income for
example…if a person takes a policy for 10 lakh rupees (this is sum assured) for
20 years (tenure) and pays premium of around 50 thousand rupees yearly. So this
50 thousand rupees going to be outflow of income from your pocket and he will
pay this for next 20 years.
Simple calculation, 50
thousand yearly * 20 years….that means this person will end up paying 10 lakh
rupees from his pockets to insurance company in 20 years and his sum assured is
also same 10 lakh rupees ( which is inflow). Hence eventually, he has not
earned any interest or extra money on his investment even after investing for
20 years and inflation will keep on rising for sure.
This is the basic understanding; we all should have before we
buy any financial product.
This method is called inflow and outflow, simple to
understand and easy to digest.
One need not be financial expert to understand inflow and outflow.
Financial expert tweak information in order to sell the product, so be little
conscious while you make such decision.
“How to decide your “Sum Assured”?
Well, this is the basic question where everybody gets
confused and wonders what their real worth is, but one should move ahead with
proposal only after answering this question.
Let me give you a simple illustration.
Suppose, John is an individual and his age is 25 and he
wished to retire by 50. His income is 5 lakh per annum. He has got mother,
father and his sister in his family.
To calculate his worth we will use below formula,
Retire age – current age = years left to retire
In this example,
Retire age (50) – Current age (25) = (25) years left to
retire.
By doing this simple calculation, we come to know till what
age or how many years he is going to work. We may say his working age is 25 at
the time of taking the policy.
Now use the below formula to calculate his Worth or Value.
Years left to retire * annual salary = Total worth or Total
Value.
In this example,
Years left to retire (25) * annual salary (5 lakh) = 1, 25,
00,000 (Total Worth or Total Value)
John’s total worth is 1.25 crore, this means he should have
at least this much insurance in order to protect his family from loss of
income. When a person dies, family face two losses 1) Emotional loss – which
cannot be measured 2) Financial loss – can be measured using above formula.
Hence, John should buy a policy which covers him for this
amount as his family will lose 1.25 crore, If something happens to him at this
time or age.
Now Important question which policy can fulfill his
expectation. Endowment or Term plan
Well, if John decides to buy endowment policy, he cannot
afford the premium that needs to be paid for Endowment plan, whereas Term plan
gives him that flexibility to pay less premium and take the maximum cover for
life. Because at the end….”Insurance is Protection.”
