In this blog, we will discuss protection – the third step of the beginner’s personal finance checklist.
In the last blog, we told you not to start investing before creating an emergency fund. But there is one more thing to do before you start investing. There’s something that’s really, really important – insurance!!!
Estimated read time: 3 minutes and 10 seconds
Hint: Insurance acts like a bubble wrapped around you, protecting you and your family from a crisis.
Buckle up, here we go!
What is Insurance & How does it work?
For starters, you pay a premium to the insurance company every year to cover your life and health. In health insurance, if you fall ill, the insurance company will pay the hospital bills for you.
And in life insurance, if you unfortunately die, the company will pay a corpus amount as compensation to the nominee, i.e. your family or spouse.
Now, these were oversimplified for beginners. Let’s get to some important stuff now.
Who needs insurance?
Everyone!!! Yes, we can’t emphasise enough on it. The importance of having insurance is increasing day by day.
You never know what happens in the future. You may plan for something 10 years ahead, but the uncertainty is very high even if you feel very young and healthy. New diseases are being found every year, and health is being affected by the climate change problem. We don’t want to sound too negative, but this is the uncertainty of life.
And insurance helps you reduce the risk of the uncertainty of life. That is why insurance is a protection tool and not an investment tool.
Life & Health Insurance:
We often delay buying insurance because we believe we are too young or healthy, and we can buy it later, after 40. But let us break this misconception of yours. You are wrong!!
Are you waiting for some bad news about your friend or family member to realise your mistake? Stop overestimating your luck.
Let us make it simple so that you don’t delay it by saying it’s confusing which insurance scheme to buy. Buy term insurance asap. You don’t have to think about any other life insurance plans. Wanna know why?
Let’s say your age is 30. An insurance agent approaches you to buy a life insurance plan that would return all the premiums you pay during the policy’s lifetime.
So if you live till the age of 65, you will receive 35 years’ worth of premiums you paid the insurance company. Sounds exciting, right? You will receive all the money you gave them, plus they insure you during that period. Wait, not so fast. Let’s get into more details.
So the agent says that the insurance company will insure you for ₹1 crore if you pay them ₹18,000 a year.
But there is an alternate plan, i.e. term insurance plan. The agent says you will need to pay ₹12,000 a year to get insured for ₹1 crore, but you won’t get back the premiums if you live till the age of 65.
The difference of ₹6,000 doesn’t seem massive when you are told you will get your premiums back, right? Let’s crunch some numbers before you make any decision because numbers never lie.
If you buy the first plan, you will receive ₹6.3 lakhs (the premium you paid) at age 65.
What if you buy the term plan for ₹12,000 and invest the rest of ₹6,000 in a direct mutual fund every year? If we expect a minimal return of 10%, your investment of ₹6,000 a year will grow into a corpus of ₹17.9 lakhs in 35 years. While paying ₹4.2 lakhs (₹12,000 every year) for the insurance cover during the said period. This is amazing, right?
Now, does this make sense to you? Insurance is a great tool to help protect your family against unforeseen events. They are not designed to make money for investors. As an investment, schemes like ULIP offer poor returns.
Also, reminding you that taking life & health insurance as early as possible in your life is crucial. The premiums are low when you buy them at a young age.
If you need help selecting a plan based on your requirements, check out Ditto Insurance. They are doing fabulous work advising on insurance. You can schedule a free call with them. Vrid has no partnerships with them. We just want to help you out.
After building an emergency fund and buying life and health insurance, you can move forward to invest your money towards your goals.
In our next newsletter, we will discuss managing your debt.
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