The Smart Girl’s Guide to Choosing Insurance

A succinct introduction to starting the financial year with wise investment options

It was everyone’s worst nightmare. But two years on, the Covid-19-induced pandemic and the indelible destruction it has left in its wake has transformed our relationship with money. Insurance is just one cog in that wheel to financial security, but one that is crucial as a means of protection against unforeseen risk. A lack of proper information has meant that most people are going in blind when they pick an insurance policy, one that has been bought on a recommendation by a friend or family member, or one that fits their budget but rarely covers the need.

A survey conducted by SBI General Insurance of over 1,000 women across tier-two cities in India found that while women strive to be financially independent, a third said that the lack of proper information and knowledge about investment and insurance was a major deterrent. “Only 38 per cent women have claimed to have insured themselves to be financially independent, signaling low levels of awareness and insurance penetration. There is a need to equip women with the necessary information so that they can make more informed choices about their finances,” said PC Kandpal, MD & CEO, SBI General Insurance.

For a large part, insurance can be segregated into two baskets–life insurance and general insurance. While life insurance protects your dependents against financial risk associated with your demise, general insurance offers financial protection against any losses linked to other liabilities such as health, motor, home, fire and travel among others.

We talk to experts to decode some insurance plans on offer and give you an insight into how you can pick the one best suited to you.

Money in the bank

When life throws a curveball, you don’t want to be caught off-guard. The very first type of insurance experts recommend is setting up an emergency fund that will help you tide over a crisis. Emergencies could range from sudden home repairs to unexpected medical expenses or even death, so squirrelling away some money into an emergency fund is a good idea–ideally, into a seperate savings account you don’t touch. “While this insurance is not really an insurance per se, it is having enough emergency money in the bank to last you six to nine months,” says Sujata Kabraji, a Mumbai-based financial coach. To arrive at this figure, she recommends taking all expenses incurred during the year into account. This would include everything from monthly household expenditure to annual payments such as insurance premiums. Add all of that up and divide by twelve to arrive at an accurate monthly figure. Ideally, set aside six to nine months of expenses as an emergency fund. It acts as a financial buffer should you get hit by an unforeseen emergency, and will help you get back on your feet.

Health insurance

Emergencies emanating from sudden medical expenses can set you back financially and even push you into debt. Which is why health insurance is deemed as a critical cover for everyone. This type of insurance policy covers expenses incurred due to medical care and typically pays or reimburse the amount paid towards the treatment of illness or injury. There are several parameters you must keep in mind to arrive at the correct coverage amount. “Start with the city you live in and figure out what the medical costs are. Not just in your city but also at the hospital you would prefer to be treated at,” says Kabraji, as medical costs could vary between cities, as well as between hospitals within the same city. This would help put a number on approximate costs of healthcare. Look for pre-existing diseases, or diseases that you are genetically inclined to inherit, and check if those are included or excluded in the policy you have picked. Experts recommend going through the details with a fine-tooth comb to ensure there are no surprises–either on exclusions or sub-limits such as those on room rent and surgeon fees, as any exclusion or restriction could translate into out-of-pocket expenditure for the policy holder. Check the network of hospitals covered by the policy as well. “If you work in a city like Mumbai but eventually intend to retire in another city, you would have to look at the hospitals available to you in both cities,” advises Kabraji.

Another number to check is the claim settlement ratio or claim paid ratio. This is the total number of claims settled by an insurance provider against the total number of claims raised by customers. “This number changes every year, so if you find that your insurance company is slipping, it’s time to ask the question–do I need to port my policy?” she says.

You can also add top-up health insurance policies as well as critical illness covers to your portfolio for added protection.

Life Insurance Policy

This is the insurance that you choose to secure your family’s financial future against life’s uncertainties such as death. Under the broad umbrella of life insurance there are different types of policies available in the market to suit individual needs. Some, such as term life insurance policies are pure policies which protect your family against financial risk in your absence. Others such as endowment, Unit-Linked Insurance Plans (ULIP), Child Plans and Pension Plans have some element of saving or investment built into them along with insurance.

“Investment products bought through endowment and ULIPs compete against longer-term investment products like equity mutual funds. While endowment plans tend to deliver returns that are in line with bank deposits, ULIPs and equity mutual funds tend to deliver returns which can be between 1.5 to two times a bank FD over a longer period, which can have a meaningful impact on your corpus. Since ULIPs have lower flexibility, using equity mutual funds is preferred for longer-term investments as they offer greater flexibility,” says Vishal Dhawan, CEO and founder, Plan Ahead Wealth Advisors. Furthermore, Dhawan also recommends the separation of insurance through a term plan and using pure investment products like diversified or index equity mutual funds.

Term Life Insurance

Of the entire lot, this is the purest form of insurance against risk. This type of insurance plan is recommended if you have financial dependents as it is specifically designed to secure your family’s needs in case of death or uncertainty. Moreover, these plans are the most affordable when compared to other types of life insurance policies. They provide higher insurance cover against the lower premium rates as there is no investment component built into it and the entire premium is directed towards covering the risk. So, if the policy-holder dies, the death benefit is paid to the nominee. However, there is no survival or maturity benefit once the policy term expires.

Review your term insurance at regular intervals to ensure that it factors in increase in salary, as well as increase in financial contribution. What you earn at age 45, and the subsequent financial contribution to your family, is likely to be much higher than what it was at age 25.

“If you are a married woman, it is prudent for your husband to take out a life insurance policy under the Married Women’s Property Act (MWPA),” says Kabraji. This is a welfare act which ensures absolute ownership of earnings, property, investments and savings of a married woman. In the event of the husband’s death, a provision under this act gives complete and undisputed control over the life insurance policy to the wife and children of the deceased. No other person or entity, including a future spouse (in the case of divorce), relatives, or creditors can lay claim to it.

If you have a home loan, take out a term life insurance that is equal to the loan amount. In the event of death, the family is not burdened with paying off that loan.

Endowment Plans

Endowment plans essentially provide financial coverage against risk, while allowing the policy-holder to save over a certain period. If the policy-holder dies, the complete sum assured is given to the beneficiaries. If the policy-holder survives the policy term, then they receive a lump sum amount on the maturity of the endowment plan. These plans are often preferred by individuals who would rather see the money that they are plowing into an insurance come back to them, even if the rate of return is poor, much like the rates for FDs when compared to other investment options.

Unit-linked Insurance Plan (ULIP)

ULIPs address the need for investment to fulfill long-term financial goals, and a life cover to financially protect your family in the event of your demise. The premium paid towards a ULIP is divided into two parts. A part of it is contributed to your life cover, and the remaining is invested in the fund of your choice. You can choose to invest in equity, debt or a combination of both funds depending on your risk appetite and financial goals. Experts recommend reading the fine print carefully and understanding the numbers before picking an endowment plan or ULIP, in place of term insurance.

“Everyone needs to understand that insurance is a risk-management product and not an investment product,” says Renu Maheshwari, a SEBI-registered investment advisor and co-founder and principal advisor, Finscholarz. She explains that these are two different functions of financial products. One (insurance) is managing financial risk that a person might face, while the second (investments) is investing to grow their wealth. The moment we combine risk with returns, neither the risk gets covered properly and neither do the returns come through properly,” she says.

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