Welcome back, folks! We’ve reached Week 5 of the Finshots Money Resolutions.
That’s right, we’re 4 down and we have officially passed the halfway mark!!! And with this, we begin the second half of our resolutions! In case you missed it, here’s Week 1 (habits), Week 2 (budget), Week 3 (income), Week 4 (taxes).
From the time we started the Money Resolutions four weeks ago, we’ve been bombarded by emails from readers like you. We’ve got lots of insightful questions, but the most common one is always about investing!!! How much to invest, the best fund to pick etc.
And I promise we’ll get to that fascinating topic. But before that, there’s something that’s really, really important we need to chat about — insurance!!! The life and health kind. Yes, we have to deal with our mortality and the frailty of our lives.
Full disclosure about me: I waited 7 years into my first job to finally get myself a life and health insurance. And the reason was simple. Investing money in mutual funds was fairly straightforward for me. But navigating the fine print and really mundane policy documents created by insurance companies was quite hard. So I kept delaying it. And delaying it even further. Till a health scare of a close friend jolted me into reality.
Luckily, I didn’t have a life or health scare in between. But now I shudder to think, what if something had gone wrong in between!
Don’t be like me!!!
How long will the exercise take? 🕰️
Okay, maybe 20 minutes if you don’t just skim through it and actually think through how much insurance you’re going to need to sleep well at night.
Well, 22 minutes tops. Let me explain why. You see, about a year ago, we folks at Finshots realised that good insurance advice wasn’t easy to come by. So, we did something quite radical. We decided to provide that advice and set up Ditto Insurance to fix the problem. Yup, Ditto Insurance is also us! So, if you want a really great experience of understanding insurance, take 2 minutes and check out Ditto Insurance. Click the top right corner for the Ditto Hotline and set up a call with our advisors. But only after you read this story, of course!
Ready? Let’s begin Resolution #5!
- I will insure my life asap!
These days, most of us start investing pretty early. And that’s because we’re bombarded with stories about the magic of compounding. How if we invest just ₹10,000 a month, we can quickly turn it into ₹1 crore, and all that jazz. We think that’s a good pot of money to have. But in this hurry, we forget that building that kind of wealth takes time. It won’t happen overnight. In fact, even if you eke out a pretty high return of 12% each year, you’d have to wait for 20 years.
Now imagine you’re the sole breadwinner in your family. You’re dutifully investing to get that ₹1 crore for your family’s future. 10 years later, the unthinkable happens. Your family looks at what you’ve saved up in these 10 years and they find a measly ₹23 lakhs. They look for an insurance policy but they find none. They realise that you didn’t secure their future…
So, yeah. Don’t wait. You need to get life insurance in place before you even start investing.
How do you estimate the amount you need?
A standard rule of thumb is that you take a bare minimum of 10x your annual income. So, if you earn ₹10 lakhs a year, you need to have a life insurance cover of at least ₹1 crore.
But maybe consider at least 15x?
2. KISS - Keep it simple, silly!
Insurance companies often play to your emotions. And also think you don’t understand basic mathematics.
A couple of years back, a friend of mine who’d hit the ripe old age of 30 was approached by an insurance agent. The agent recommended a life insurance plan that would return all the premiums he paid during the lifetime of the policy. So if he lived till the age of 65, he’d receive 35 years worth of premiums he paid the insurance company. So, my friend gets excited. Because typically, insurance companies don’t return the premiums you pay them.
I asked him what he’d have to pay for a ₹1 crore insurance cover and he said it was ₹18,000 a year. Let’s call this Policy A.
I checked to see the premium he’d have to pay if he just bought a typical life insurance policy. You know, the one that wouldn’t return premiums. It turned out that he would only pay ₹12,000 a year. And that meant, he could invest the balance of ₹6,000 wherever he chose to each year. Now let’s call this Policy B.
So, I opened up a spreadsheet to help him make a decision.
With Policy A, he would pay premiums worth ₹6.30 lakhs. And he’d get it all back when he turned 65.
In Policy B, he would pay the insurance company premiums totalling ₹4.20 lakhs. But the ₹6,000 a year that he invests (at 10%) would grow to ₹16.20 lakhs!!!
So, do you really want to give the insurance company your money for free?
Sidebar: Check out the “secret” section below. You might be able to snag an added benefit with the money you save from the insurance company.
So, what kind of life insurance should you buy?
Term insurance. That’s it. Remember the word. This really simple type of insurance has only one job to do — protect you for cheap. Bang for your buck!
3. Even if my company provides me with health insurance, I’ll take one of my own.
Wait…why do you need health insurance if the company already provides one?
Having employer-provided health insurance is fantastic, but, life’s full of ifs and buts.. What if you want to jump on the entrepreneurship bandwagon? What if you just want to take a break for a few months? What if you just want to retire early? Or worse, what if you get laid off? You probably won’t have any health insurance in each of those cases.
And if a medical emergency crops up, well, dipping into your savings will be quite a painful affair.
Most of us forget about health insurance when we’re young and hearty. Because we feel we’re pretty invincible. But we wake up one day and find that we have a slipped disc, or diabetes, or hypertension. You look to buy a health insurance policy but the insurer isn’t pleased. They refuse the policy or charge you a ridiculously high premium. And then you wonder…
So, buy a health insurance policy for yourself and your family asap! Because you never know.
4. I will disclose everything. Even if my agent tells me not to.
If you’re young, in most cases the insurer won’t ask you to get a medical checkup. Instead, they’ll just ask you to declare stuff about yourself. They’re trusting that you won’t lie.
A few years ago, I finally pushed myself to get a health insurance policy. I met someone from an insurance company. He explained the policy. It seemed to cover everything I wanted. Before we went ahead with the forms, I told him about an injury I had. He told me that the insurance company would probably deny the policy if I disclosed it. And since it had been a while since the injury, I could get away with it by hiding it from the insurer.
But you see, insurers have a funny way of sniffing out lies. I didn’t want to take the risk of paying the hefty premiums and then getting a denial letter if I make a claim in the future. So I made the disclosure and sat back calmly. I was denied the policy.
See, the thing is, the agent didn’t really care about me. He only wanted to meet his sales target for the year. I'd met him in February, right before the financial year ended. He worried that if my policy was denied, he would be robbed of his commission.
Now you know why you need someone who can trust? #AskDitto. :)
5. I need to keep my family informed
Now that we’ve got so far, you need to remember that you should inform your family about every insurance policy you hold. Where the health insurance card is? Who to contact in case of emergencies or help with an insurance claim? How to proceed with a life insurance claim? Are there passwords they need to in order to access the policies? Everything.
What’s the point of buying all the policies if you keep them in the dark?
A secret for you 🤐
How about we get you some free life insurance? With no strings attached!
Yes, we’re not kidding.
Certain mutual fund companies offer a free life insurance policy when you make investments in their schemes. It comes with certain limits and rules. For example, you need to make a monthly investment for at least 3 years. Or you can only get an insurance cover that’s 100x the monthly investment you make. Or that the maximum limit is capped at ₹50 lakhs.
But free, is free no?
So if you’re someone who has been denied life insurance for some reason. Or you're someone who has taken a break from work for parental duties, and you don’t have a stream of income to show as proof to an insurance company.
Or even if you just want something for free, you know where to look.
PS: BTW, we only said that insurance isn’t an investment. An investment can still double up as insurance. ;)
The soundtrack to end it🎵
Rappers, boy bands, everyone knows the importance of insurance!
Life Insurance by Tee Grizzley
If you're not in the mood for rap and prefer something old school, here's another one.
Take Out Some Insurance On Me Baby by The Beatles
You didn't think there would be so many people crooning about insurance, eh?
Coming up next week 📅
Finally, we’re going to the part that most of you are excited about. Next week, we’re going to set some Goals!!! All related to money, of course.
What did you think of today’s Money Resolutions? You can find us at firstname.lastname@example.org.
See you next week!