How to Buy Insurance

 

If we go to the literal meaning of insurance, then it means such an arrangement, in which a company charges a fixed premium and in return gives a guarantee of compensation in case of a particular loss.



In the case of life insurance, it can be understood in simple words – an agreement in which a company takes the premium and pays compensation to your nominee in case of your death. Keep in mind that what most agents are selling is not insurance at all. For what amount should you buy insurance?


There are many ways to arrive at this answer. The general understanding is that you should get at least 10 times coverage of your current annual income. This amount can change according to the income of other family members, your property, house etc.


If you are not able to understand why 10 times annual income cover should be taken, then let us understand it with an example:

Ask the question how much amount will your family need for essential expenses if you are no more? When you find the solution to this question, the amount that will come in front of you will sit at about 10 times your annual income.

how to be sure?

What is right for the vast population of the country can work for you as well. Many people know how much premium they are paying to the insurance company. They don't know how much money their family will get in return if an accident happens to them.

 

In fact the life insurance business has been structured in such a way where the criterion of success is not the amount insured of the customer but the criterion of the premium he is paying.

Interestingly, many products in this space are not insurance products at all. They are expensive and are being sold as investment products. The insurance coverage in them is very less and it is kept only as per the requirement of the regulator.

 

The job of the insurance regulator is to protect the interest of the customers. Unfortunately in the insurance business, the regulator measures its success by the amount of premium collected from the customers. It should be how much insurance was given to the customers. This should be the measure of success.

The annual report of insurance regulator IRDA does not reveal the amount insured of people. The regulator simply shrugs off the insurance density. Insurance density includes premium income, ratio of country's growth rate (GDP) etc.

 

IRDA data does not tell us the amount of insurance that has been given. They tell how much money was collected from the people as premium.
The question is, when a customer dies, how much money does his family get?
*How many customers know about this cover?
*What is the ratio of total premium charged and insurance coverage provided?

 

This information is either not available, or is kept confidential.

This attitude of the insurance regulator is also reflected in the person who sells you insurance. How agents try to impress you is a long story. While buying insurance, just keep in mind that the coverage should be 10 times your annual income. If you get this then you are buying the right insurance product.

The basic rule of buying insurance is that you consider insurance and investment as two different things. Insurance sellers in India confuse you by mixing investment and insurance. Don't buy term insurance because you don't get anything in return - think about this logic. You are buying insurance for protection against risk.

 

The agent tries to sell you only in which he gets more commission. He can't be honest with you. If the regulator is asleep, then the agent will do arbitrariness, you need to be careful instead of getting fooled.

(The author is the CEO of Value Research. Views expressed here are personal.)