GreyMatter, Personal

How To Buy Insurance

If you are over 30 and an Indian, chances are you already have “some insurance cover”. Chances are also pretty good that you are ‘under-insured’, which means you do not have enough Insurance cover to safeguard the interests of your dependents.

According to John Nelson, chairman of Lloyd’s, the world’s largest insurance market, “India is the second most under-insured market in the world“.

So, what’s going wrong?

Two things, we think. First is the relatively poor understanding of the buyer. Second is the selling practices of the Insurance service providers.

First things first – you need to understand what you are buying.

The point of taking “insurance” is to insure against risk, so that your loved ones are taken care of, even when you are no more.

Imagine you earn about Rs. 50,000 per month. Your annual income, therefore, amounts to Rs. 6 lakhs. If your current expenses are more or less being met by your income, with a modest surplus being generated each month, your family will need that annual figure of 6 lakhs per year, if you are no more.

Assuming a thumb rule of 10x to provide for roughly 10 years of their living, that amounts to Rs. 60 lacs. Even with a modest inflation rate, that figure is likely to be closer to Rs. 90 lacs, in order to provide for the cost of living in the future.

Therefore, an adequate amount of Insurance cover for such an individual would be close to Rs. 1 crore as sum assured. And that’s just with a take-home salary of Rs. 50,000, to accommodate 10 years of your family’s expenses. If you earned double of that, the target sum assured would be Rs. 2 crores.

In addition to the standard calculations shown above, you would also need to add to the insured amount when your life-stage changes e.g. a new addition to the family, or when you take up a large home loan. But, most of us don’t factor these variables into account, and merely end up buying “some insurance” as a tax-saving instrument.

So, if you do not have adequate insurance cover, don’t go down the path of buying exotic, hybrid products that offer insurance cover plus the promise of market-linked investments. Instead, choose a “term” product to cover your basic risk at the lowest cost possible. Then, look for other options to add to your portfolio.

Note: Insurance agents may not talk about such products unless probed, because they earn very little commission on such products.


This post has been written for educational and informational purpose only, and does not constitute personalized investment advice. The above commentary, opinions and recommendations purely represent the personal and subjective views of the author. Please consult a Financial Planner before acting on it.