Buying insurance? Don't make Sachin's mistake

There’s a fine line between insurance and investments yet it goes unnoticed. Till date, many of you buy insurance in the name of investments, which is wrong! You should buy insurance so you can protect your family financially in the unfortunate case of the death of the primary holder.

Let’s understand this with this little story.

Sachin, 26, works with a multinational company. He has three dependents; his mother, father and his younger brother. His mother is a house wife, father is retired and younger brother is doing his MBA. Sachin is the only earning member of his family. He makes Rs 20,000 per month and he plans to retire at the age of 60. He is worried about who will take care of them if he dies.

One day, Sachin gets a call from an agent asking him to buy an insurance policy. The agent throws some jargons like guaranteed returns and Sachin falls prey. Sachin agrees to pay Rs 10,000 in the product, which is expected to give him Rs 11,000 at the end of 1 year.

Was this the right move? NO!

Why? Sachin has made an investment indeed but the investment does is not in line with his goals. What is his primary goal? To protect his family in case of his death.

What does Sachin really need?

What Sachin needs is a term insurance, which covers risk for a limited period and will substitute his income after retirement. He should buy a term insurance costing around Rs 5,000 per annum (Incidentally, term insurance costs half of a guaranteed insurance product). And, in case of his unfortunate death, his family will get Rs 30 lakh, which is a substantial sum. If this amount is deposited in a bank, it would give at least Rs 20,000 per month as interest. This could have actually helped Sachin and his family. But unfortunately Sachin invested in a scheme which will give him a guaranteed return of 11,000 after a year. This Rs 11,000 will not help Sachin’s family to survive in case if he dies.

Why Rs 30 lakh sum assured?

We have used a rule of thumb (Income Multiple rule) to calculate the total sum assured required for Sachin.

Income Multiple Rule:

As per this rule: You should buy life insurance cover for a sum which is equal to a certain multiple of your annual net income. Annual net income means, the residue of your salary after paying for your personal expenditures. The multiples are mentioned below in the table.

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Sachin, who is 26 earns a salary of Rs 240,000 per annum, has a personal expense of Rs 2,000 per month, ie Rs 24,000 in a year. His life insurance need falls in the range of 12 to15.

His net income: Rs 216000 (Rs 240000-24000)

His life insurance need: 216000 x 14 = approximately Rs 30 lakh

Where did Sachin go wrong?

He forgot to ask himself three basic questions before making investments:

1. Do I need this product? If yes, then how much do I need to invest?

2. Do I understand this product?

3. Can I become financially wealthy with this investment?

Tip:

So the next time you go out to invest, ask yourself these questions. If you have answers, go right ahead. Else, you might want to think again.

What do YOU do with your money? Where do YOU invest? Share your story with us. Mail us at [email protected] mentioning your name, age, profession and the city you reside in. We would love to hear from you!

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