How much insurance do you need? Why is a pure risk cover better than an investment-cum-insurance plan? And what are the points to keep in mind while buying a term plan? All the basic questions that a buyer faces at the time of buying insurance answered.

Why a term cover?

"Buying insurance is a financial decision, so people should evaluate every practical issue and not get emotional while buying it. People feel that thinking about one's death for no particular reason is a morbid thing. They tend to get emotional and as a result mix investment with insurance. Most of us won't hesitate to pay hefty premiums to insure our vehicles but when it comes to our lives we tend to start thinking about the returns we would get at the end of the premium-paying term. This is a very wrong way of approaching risk cover," says certified financial planner Amar Pandit.

How much insurance?

To decide on the amount of insurance that a person needs, "While buying insurance an individual should take his expenses into consideration. These can be categorised under three heads: a one-time immediate payment, for example, to pay for a house or a ceremony (a daughter's marriage), a one-time long-term cost (education loan for a child), and day-to-day recurring expenses. The sum of these three expenses minus the investments (fixed deposits, mutual funds and so on) is the amount of sum assured that a person should have."

Points to remember

While buying a term plan a person should always follow the rule that the premium-payment term should not be less than the term of the policy. Thus, a person should not buy a term plan by paying a one-time lump sum premium, but should make yearly premium payments. The reason for this is as follows: imagine that the annual premium for a term cover is Rs 3,000 and the policy has a 10-year tenure. In the normal course, the insured would pay a premium of Rs 30,000. Now, even if the insurance company offers an equivalent single-premium policy at only Rs 25,000, opt for the regular premium option. Here is why: in case of an unfortunate event after, say, three years (and a total premium payment of Rs 9000), the regular premium policyholder would get the same sum assured as someone who had paid Rs 25,000 (in the single-premium option). So why pay in advance?

In today's world, like Humpty Dumpty, all of us are sitting on a wall of risks. It is important that we buy a good protective cover to prevent our families from destitution in case of an untimely tumble.