This is in continuation of my “How Many” series articles.
The topic this time is how many insurance policies can one person have ? While we did touch upon must have insurance policies for an investor in his overall financial planning, what might confuse the investor is how many such should he totally have.
If you are not aware of this number, you could get loaded with innumerable junk policies which could hurt your overall financial health. Let us go step by step to get to the magical figure.
Having understood the basic premise that insurance is meant only for protection and not for investment, the obvious conclusion an intelligent investor will make is to take term insurance. That makes our count of number of policies as 1.
How many such term insurance policies should you buy ? Generally, this is driven by the life stage events of a person. The first life insurance policy a person should buy is when he gets a job. The second policy can be bought when he gets married.
The third, when he has a kid. Going by this, our count now becomes a minimum 3. You could even make this four, but then the more policies you take, the more tracking you need to do of when premiums need to be paid. Don’t go beyond 5 by any means.
Remember that if you have bought children’s plan and Unit Linked Insurance Plans or ULIPs as well, the total count should not extend beyond 5. Don’t buy ULIPs, endowment plans, moneyback plans if you possibly can. The conclusion here is that the total life insurances should ideally not cross 5.
It is generally advised that life insurance should be taken from more than one insurance company. Let us see why. Suppose you have taken term insurance from just one insurer and on your demise, the claim is challenged in court due to some reasons.
If there is no payout eventually, your family will be left with no money – this would defeat the basic purpose of why you paid premiums to an insurer to cover your life. In order to reduce this risk of claim rejection, it is advised that you spread your risk by taking insurance from more than one insurer.
Make sure that your 5 life covers (or minimum 3 as explained above) are spread evenly across different insurers.
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Among the general policies, a health insurance policy is a must. This is same as mediclaim.
An investor must also take a personal accident insurance policy.
Over and above these two, there is critical illness that a person can take optionally. Financial planners generally recommend such products as must have. Assuming you go for this, our count now becomes minimum 6 and maximum 8.
Now, unfortunately you do have more assets you want to protect. You want to drive your own vehicle and live in your own house. Well, there are policies you must have for those too. The motor insurance is mandatory for the vehicle you drive so there is no escape here. Our count just increased.
If you stay in your house, you might decline to take insurance for loss of belongings in your house or for structural damages to your house. If you think for a moment, the house is more precious and expensive than your motor, yet you took motor insurance because it is mandatory in India. What if there is a fire in your house or an earthquake damages the structure of your house.
Home insurance is an important protection that all investors must have. I will take the liberty to increase the count yet again.
Now we could go on and on and add another protection policy which pays the outstanding loan (on your demise) that you have taken on your house. But for the moment let’s assume that the life insurance plans will cover such needs.
The count stands at 8 minimum and 10 maximum.
So there you have it. I think it’s challenging enough to track 8 policies year on year. You could argue that you can club in the health and critical illness covers with a ULIP and make the count come down. Remember, finance is simple and you should buy products which are simple as well. Its generally advised to buy life, health and critical illness plans separately.
Keep the following things in mind :
- Don’t buy insurance to save tax.
- Keep a placard on your forehead from Jan-March each year which reads “Insurance agents stay away”.
- Buy the minimum 8 policies mentioned above. Reduce life plans if you don’t need. Add more if you require.
- Keep a tracking mechanism in place so that you do not miss out on paying premiums.
- Go for term insurance plans when you take life insurance. They are the cheapest and best.