THE INSURANCE PLAYBOOK
Abhishek Sharma
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- Concept of Insurance
???? The basic concept of insurance is very simple. A very large number of people pool their money at one place, in a central pool. So, that if there is a mishap with anyone, they can get monetary relief from the central pool. This we also called "Risk Sharing" in finance terms.
???? Insurance companies here work as intermediaries. People deposit their money into the central pool through central companies and in return these companies maintain that central pool filled with money. If you buy insurance, you've to set a particular amount every month that you need to pay to the company as a premium. But premiums don't need to be monthly. They can be made quarterly, yearly, or as a single payment. Monthly mode is very common.
- History of Insurance
???? The history of insurance is very old. We can find its evidence even in 100 BC. When the Roman military leader "Gaius Marius" had his soldiers from "Burial Clubs". If a soldier dies in a battle, the other members of the club pay for his entire burial. And so, every soldier contributed money to the burial club. Even, before this in 1750 BC, "Babylon" was ruled by "King Hammurabi". Archaeologists discovered a law of his reign that talked about "Maritime Insurance" The merchants who took loans for their ships paid extra money to the lenders. In return they were guaranteed, that if their ship sank or was stolen, they would not be asked to repay the loan.
???? Now, back to the modern era in 1666. A bakery in London caught fire. The fire spread unimaginably with the wind. In total 13,200 houses were burnt. Including major buildings like "St. Paul Cathedral" and the "Royal Exchange" It was only after this that the concept of insurance was invented in England and for the first time in history a company named "Fire Insurance" was born. This was the 1st company set up by "Nicholas Barbon" in 1667. By 1680 it had grown into joint stock company called the "Fire Office'. A few years later in 1676, "Hamburger Feuerkasse" was established. Considered to be the oldest insurance company in the world. It was established in "Hamberg city in Germany" & fortunately still working.
- Industrial Insurance Concept
???? When Tom Cruise films his Mission Impossible Movies, they need to get insurance before anyone performs dangerous stunts. In case he gets hurt or diess, the insurance company will pay to the film production company to compensate for the loss. The insurance budget of the latest mission impossible film is ~$3 million. But you do not need to worry about these heavy types of insurance. The kind of insurance that matter for us are like Term or Life Insurance & Health Insurance.
- Fact Check About Term/Life Insurance:
???? Before we dive into deeper, there is no need to get insurance. If there are no dependents of yours. For example: you are 70 years old, your parents are already passed away, and you have not married yet. When you pass away, there won't be a financial disaster in anyone's life.
???? If you are a billionaire like Musk or Ambani. If you have already earned a lot of money for the next 7 generations to live comfortably then Mr. & Mrs. Billionaire there is no need for this insurance for you :)
???? But oops! If you do not fall under any of these categories like me then insurance really matters to you.
- Types of Life Insurance:
?1st where you get 100% of your investment also called "Zero Cost Insurance".
?2nd type of insurance is for a particular term. You can decide a term of anywhere from 10 to 30 or 40 years and if you live through this term, if you will survive. You won't get the money. This we also called Term or Life Insurance". Many people use the term Life or Term insurance interchangeably but in actuality, they both are the same.
- Schemes for Term Insurance Plans:
?? Let's start with an average lifecover of 2 crores INR or ~$2,31,149 for a policy term of tenure 12 years. The early you get term insurance it should be cheaper for you. With the age, the premiums also keep increasing. If you get insurance, you can lock the premium you would need to pay which means the amount of premium will be fixed throughout the tenure. This also comes with the advantage of inflation, the premium will be the same. Apart from this there is an another benefit of tax deduction. Under Section 80 C in India, any insurance premium you pay eligible for a tax deduction.
?? You need to decide your policy term based on your age. For an example: I am 22 right now, I think a term for 20 years is best for me and it will also cover till I am 42 to 45 years old. It is also obvious that based on the size of your insurance cover, your premium will change accordingly. If you are looking for a high life cover or if you want your family to get 30 million INR or ~$3,46,600. You will need to pay a higher premium.
?? Now the question is how much life cover should be good for you, a 10 million INR, 30 or 50? This can be fix by a simple calculation called "Thumb Rule"
- Claim Settlement
???? This is the ratio shows how many claims out of the total claims received by the company it settles. In how many cases has the company actually paid the settlement amount to the family? There is a govt. regulatory agency in India IRDAI releases the claim settlement ratios of different insurance companies. The higher the ratio, the good track record the company's holds.
- Health Insurance
? Imagine there is a man who works responsibly. Single handedly, he is taking care of his child education, parents medications, his sister's college fees but suddenly one day he got ill, and test came with a report says that he has a very dangerous disease and the medical expenses would be 1 million INR to cure it. Term insurance only helps your family when you die.
? In such cases, you will find to need the best health insurance. The company's health insurance is not sufficient. Most employer-provided policies have a limit of 2 lakhs rupees only. per annum, which is adequate only for minor illness. Moreover, this coverage is terminated once you leave the job. Even the are most of the hospital treatments and tests not covered in this. The same as term insurance, the early you get the health insurance the cheaper it will be for you. While reading the T&C, terms & conditions. You must check these 20 points given below very carefully. ??
- Points-To-Remember: