Children's insurance plan - what do you really need?

Before you start reading the rest of this post, I must ask you whether you have read my post Good and Bad insurance plans. If you have not, I seriously suggest that you read that before going (reading) further. Assuming that you did, let us move on.

Securing the future of your child is an important thing. And I should proudly say that this is something my fellow country-men (well at least most of whom I know) think about and do something about. That is certainly the right thing to do. How ever, I have also noticed that several of them buy insurance plans for their children with out doing the entire homework. Most often they start down the right path and deviate (or should I say attracted by marketing campaigns) towards the wrong one.

You still with me!! Good, you obviously believe in doing the right thing the right way. So, let us go over this by taking a simple example to drive the point home. You have a 5-year-old kid who would go to college at the age of 18 and let us assume that he or she would need about INR 5,00,000 (at today’s rate) for college education. You are the only earning member of your family. What if something happens to you? You, like any sensible parent should think, do not want your child’s education to go bad because of you not being there.

So you calculate how much your child would need when he/she is 18. Today’s INR 5,00,000 will not be the same when your child is 18 because of what is called as inflation in economics or financial circles. At an assumed average inflation rate of 5% and adding a buffer of say 1% (since this is an unpredictable economic parameter), you end up at about INR 11,00,000 for you child's education. So you should have a risk cover for 11,00,000 for your child’s education? May be.

“May be” because there is an alternate scenario. Suppose you have invested about INR 5,00,000, specifically for you child’s education, in a fund earning 8% per annum. You would end up with (assuming monthly compounding) a little more than INR 14,00,000 when your child turns 18. In this case, you may not need an insurance plan to take care of your child's education. Now, I am assuming that this is a fund earmarked for your child and under no circumstances you will touch it. If not, you might need insurance to take care of the risk.

On the other hand, if you have been (are) investing on a regular basis targeting the INR 11,00,000 in our example, my recommendation is to have insurance for any amount that would add to this kitty in the future. For example if you have saved INR 1,00,000 to-date and expect to add another 10,00,000 (including your contribution and returns) in the future, then you are better off buying a term insurance plan for INR 10,00,00 and make your child as the nominee.

Hope you know by now why it is important to understand what you really need. Remember that this post is intended to help you determine your need. If you are looking for what all benefits you must have in an insurance plan (children’s plan or term insurance or something else) that you buy for your child, please look for future posts. Meanwhile, please feel free to provide your comments and I will draft more examples. Till then, happy need thinking.

Good and Bad insurance plans

I have been thinking about what my next post should be? You might ask why, when my last post Must have insurance plans - # 2 mentioned an article about life insurance. Well, the reason is a comment that I got for the post - Must have insurance plans - # 1. Sriram asked me to provide details about good health insurance policies.

The issue is the word good. I have always thought of English as an interesting language – simply because several English words are relative in nature. – the word interesting included. Good and Bad are certainly relative words especially when you think of buying something from the market. Take a TV for example; there are sets available with the very basic features to using it as a computer and of course at varying price points. How much good in this case, as well as in most cases of making “BUY” decisions, is a function of what you really need (and will use) and what you can afford. And you would appreciate that it is so difficult for me, who hardly know your requirements, to help you make an absolute decision.

Now you know why I have been thinking. There is one more reason – a far more important one - from my perspective. Purely as a matter of principle, I had decided that I would never recommend a particular policy from a specific company. It is not my intention to be a marketing agent for insurance companies. On the other hand, I certainly want to help you understand insurance plans and help you make good decisions. Kind of contradictory ah? - Now you understand my dilemma!!

What I finally decided is to provide details about what you should look for in good insurance plans and what benefits that would give you. Hopefully, that should help you decide on what you really need and let you zero in on the right one to buy. I might still analyze some plans available in the market and provide you the “good’” and the “bad” – but I am not going to make a decision for you. You must be the one to take decisions related to your life – and be responsible and accountable for your decisions – another matter of principle and personal belief.

Now that we have resolved my dilemma, at least from  my perspective, you need to understand that insurance in its strictest form is not an investment vehicle. It is a generally accepted principle that insurance is a mechanism that could help you face uncertainties of life – death, accidents and health problems all included. Insurance is all about helping you face unpleasant possibilities.

So my dear reader, the first thing that you need to do is think about potential unpleasant possibilities and how you can be prepared by buying insurance. Now, you must also determine which unpleasnt possibilities you really need to have covered. There has to be a REAL NEED for you to cover for an uncertainly or risk by buying an insurance plan. Time for you to put on your thinking cap and think about  risks you foresee and what you have done so far to help mitigate some of them. Meanwhile, I will draft a few more posts with some examples to help you with your decision process. Remember that I expect you to make the final decision, so please do think hard about why you need a particular risk to be covered.

Must have insurance plans - # 2

You read Must have insurance plans - #1 ?. So what is second in the must have insurance plans list? Did I hear Life Insurance? You are close!! Read on to find why it is close, but not there yet.

How many times have you driven across the country or a city in this country? How many times have you thanked the heavens that you were not the one in an accident? You think that you drive slowly and carefully and hence will not meet with an accident. Well, think again. Even better, ask yourself a few questions.

• Do you know how roadworthy other vehicles are?
• Have you got any control on quality of driving license issue?
• Do you control how others drive?
• Can you improve road conditions, even if you like to do it?

You must have answered with a resounding NO for all questions – i.e. unless you live in Utopia. The best-case scenario for you is not to trust driving or civic senses of others, but to protect yourself. Apart from buying a decent car with decent safety equipment, you must have a personal accident cover – second on my must have insurance plans list. Why is it second? Read on…

Oh, before I explain the ranking, if I heard you say that you don’t drive, realize that slipping in the bathroom and hurting yourself is also an accident. Falling down and hurting yourself while walking your dog is also an accident. Basically, it covers everything (almost) that can happen to an individual by accident. And it does not burn a hole in your pocket. Typical yearly charges are about INR 1000 – give or take – for a cover of INR 10,00,000.

If you are involved in an accident (I certainly hope that you do not) and if you survive – you must make sure that you have enough protection to get the required treatment for you to get back in shape. If you end up with a disability, then you should be in a position to make changes (that cost money) for you to do the best you can to function in a normal way. That could include

• modification at home – may be a ramp, a toilet for disabled
• buying a sophisticated wheel chair for you to move around
• get regular nursing assistance etc.

Again, it is about your financial ability to drive through an unexpected accident without serious financial after effects and dependency on others – if that is possible. Then life is all about possibilities and Insurance is all about helping you work through unpleasant possibilities.

Still wondering about Life Insurance? Wait for my next post to read why (and more importantly when) you should buy life insurance? Till then, you have enough time to read your decision meter.

Must have insurance plans - # 1

There was an article in a leading personal finance magazine, think about a year ago, about insurance policies you must have. While I buy (and of course read) this magazine, I could not help but think about the article not answering a fundamental question – what should be my first insurance policy?
 I guess life insurance will win by a mile if I take a poll. I beg to differ. Before you take the sword out and get ready to fight, may I ask for your patience? Think about it!!. You and your ability to earn comes before everything else – because that is your means to take care of and protect people you love - family, friends, parents. Pure life insurance does not protect you and your ability to earn. So the question is what do you do to protect yourself before you protect any one else.


Protecting yourself could mean a lot of things – but good health is your most important wealth and protecting that should be your priority. And from that perspective, the first policy that you should have is a health insurance plan. For those of you who think that you are covered by a company policy, you could be wrong!!. Read my post “Company health policies - Are they good enough?”. Here are more reasons as to why a health insurance cover should be your first insurance policy.


Your ability to be healthy and by extension to earn regularly is the key to your survival (taking care of your family included). How ever, even if you work out 2 hours a day, eat only greens and corn flakes through the day, there is no guarantee that you would not have a health problem. And the cure, to certain extent, for that unpredictability problem is a health insurance. Your first priority is to ensure that you can get the best treatment and has a reasonable chance of recovering from a health issue. You don’t want to drain your savings, swipe your credit card (and pay interest on interest) or worst case - borrows money for your treatment. In my view, the most important consideration is your ability to tide through a health problem without serious financial after effects.


Now am I saying that Life Insurance is not required? Absolutely not. You do need that in most cases to make sure that your dependants are secure. They key word is "dependents", though. Is it second on my list?? Read my next post to know what comes second and why? And that should be enough time for you to read your decision meter - and hopefully to buy a health insurance cover and protect yourself.

Company health insurance plans - Are they good enough?

Is there or was there ever a place called Utopia? I don’t know, but I do know that signifies unrealistic dreams. If you thought (still thinks) that your company health insurance is good for your health protection, then you are in Utopia. Want to know why, read on!!
Most good (with a capital G) companies offer health policy for employees and their families and in some cases parents. Now the key word here is “employees”. Your policy is good enough as long as you are an employee of the company. Now what on the earth makes an otherwise sensible individual like you think that you will remain an employee forever?
Several things can change – you might be asked to go (as painful as it is), you might take a new job, you might decide to start something on your own. The best-case scenario among these, that of you taking a new job, still might leave you unprotected for a certain time period (between your relieving date and joining dates). Again, I must ask what makes an otherwise sensible person like you to think that you will not have a health issue during that period.

Now onto more serious things – Assuming you are the cream of the cream in your current company, you don’t see yourself switching or getting kicked out – may I ask (again) - what makes you, an otherwise sensible person, think that you will not need health insurance after you retire (60 the last time I checked). What makes you think that any insurance company would offer you a cheap policy at that age? And let us face the reality – Probability of health issues goes up with age. (In case you have wondered, that is why life insurance premium increase with age).

Now everything goes well (Murphy does not like that. mind you), you work for the some company until you are sixty, you will buy a new policy at that age. If that is what you think, here are three reasons (among many others) as to why it makes sense to do it now.

1. Most insurance companies do not insist on a health check up if you enroll before the age of 45. Pre-existing diseases are covered, in most cases, after first 4 years.
2. The sweetener – Income Tax deduction for health insurance premium payment to 15000 for your health polices. i.e. you pay 10050 for a 15000 policy if you are in the highest tax bracket.
3. Your job and hence the employer coverage is not guaranteed (remember that the employee is covered and not you as in individual)

Time to read your decision meter – If you ask me, it is not worth your life or health to bet on inflation or deflation or counting on you being healthy at 60 and continuing to be in your current employment until you are sixty. That would certainly, at least for me, make Utopia a nice palm laced island in the middle of the Pacific. You need to make a call – that better be the right call. Happy Health!!

Insurance Rate of Return Calculation

As promised, here is how to calculate annualized returns for insurance policies ( in fact for any investment)
Pre-conditions - You need to have Microsoft Excel or an equivalent spreadsheet tool (unless you are a financial/ mathematics wizard).

1. Open a new work sheet
2. In Column A, list your date of payments (or date of reciepts)
3. In Column B, list your payments (or reciepts). Mark receipts in negative. Example -20000 for payments recieved.
4. Focus on an empty cell and select "Insert" > "Functions" > Financial - XIRR
5. Select all columns containing payments and receipts under Values (Tip - You could click the small button at the end of the "Values" box and multi select all payments/receipts columns)
6. Repeat 5 , this time for all columns containing dates
7. Click OK. Multiply the resulting value by 100 and you have your annualized return (or true return)
8. An example is given below

Happy return calculating..

Guaranteed Return Plans - Are they worth it?

400% guaranteed returns - WOW, amazing returns for an insurance policy - even in India - the emerging market favorite. Several Indian Life Insurance companies have come out with guaranteed return policies/plans in the recent past. Return numbers like 100, 200 are very attractive - and the aim is exactly that - attract investors.

The million-dollar question is "do you really know what is guaranteed and what the actual returns are?” If you do not know or if you are not sure, read on before you buy one of these guaranteed return polices.

Let us take LIC Jeevan Nischay, a single premium policy, for example. For an investment amount of INR 25,000 for a 35-year-old healthy person for a term of 10 years, it offers you a guaranteed return of INR 44674. The annualized rate of return of this so called "guaranteed returns" is 5.98%. Now compare this against some schemes that give guaranteed returns backed by the Indian Government.

PPF - 8% - Yes it is locked for 15 years, big deal when you are anyway looking at 10 years - and no tax payment on investment and returns.
NSC - 8% - No tax payment on investment. Returns are taxable, but annual returns are deemed to be reinvested and are eligible for tax rebate under section 80C.

At 8%, my final returns for an investment of 25000 after a term of 10 years stand at INR 55491. Before you say it offers insurance cover too, buy a term plan for about 2500 (one time premium, term 10 years and sum assured of 1,00,000) and invest the rest in the govt schemes and you still end up with a guaranteed return of INR 49941 (annualized return of 7.16%).

In summary, guaranteed is a relative term in practice and is misleading at times. Depending upon your tax and financial status, these policies may be good for you. The point is simple - know your options and more importantly know what guaranteed really mean before you take the plunge. The real measure of investment returns is annualized returns. How do you find it out without over working your brains? Look for my next post.