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.
Life Insurance
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.
General Insurance
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.
Excellent one. Totally agree that life insurance cannot be bought for tax purposes.
I think 8 policies are very tough to track. We need less, not sure how.
@Deven, Less is better. I don’t see a way out.
I do not agree. I think one life insurance policy can be enough. Why take around 3-5 as you mention ?
I also think ULIPs or endowment plans are good – why do you say they shoudl be avoided ?
For an investor who does not understand share market, investing in ULIPs is better.
@Raj, Why do you say one life insurance policy is enough ? I mentioned earlier why you need more than one. ULIPs and endowment plans are not good investments – that is the subject of another article. If an investor wants exposure to the stock market, he could try MFs, why ULIPs ?
Sorry to disagree with you on putting a limit on number of policies! In my personal opinion more policies should not be interpreted as bad insurance portfolio! I would like to add that the age of entry to these policies are of much more importance than just the policy type or the number of policies.
I have heard this so many times that Money Back and Endownment are not good policies to consider as they blend the two fundamentals of investment and insurance. But they have their own place in the market and should not be generalized as sour fruits. Endownments are a decent buy if one is < 25 years. Most of the endownment type of policies have an age of around 20 years(I would recommend to not exceed 20 years), so if taken at an early age could create a decent corpus for the insure in his/her mid-40s age, a crucial age in anyone’s life as that is a time when one needs corpus for his/her kid's education and/or daugther's marriage and/or retirement planning etc.Agreed that the corpus could be higher if invested in equity or probably even the debt market(I remember your fixed income securities article), but considering that insurance is a rider they could balance the difference in the accumulated corpus.
Another important attribute is that one must match their insurance sum assurance based on inflationary adjustments. A mediclaim of 2L may have been a good bet in 2007, but probably not anymore(especially in metro cities).The inflationary adjustments could also lead to buying more policies thereby increasing the number of policies held.
@D. Bahroos, Agree with your last point about SA being based inflation.
You have in fact given all the answers to the argument of having less policies – the basic and most important of which is insurance is not investment. And if that is the case, why would someone buy moneyback and endowment plans. I did not say these are sour fruits but they are not the best vehicles to make money.
Personal Finance is about using the current resources at hand to make the MOST of your money in the safest way.
I don’t think a person buying moneyback and endowment plans would not be rich in life, its just that had he used the right strategies, he would be more rich. And more wise.
I am still working on the equity article…
@TheWealthWisher, Dhiraj, was the equity article OK or were you looking for something different ? Let me know.
we want joining insurance, what is producer, I am working in saudi arabia , my native place india tamil nadu, could you tell me information, monthly perineum how much , who is contact person, we want 3 years policy.
@Kabali,
What is your requirement? What kind of policy you are looking for?
If its for yourself and you have dependents an online term plan will suit you.
Please read through various insurance related articles in this website you would get more information.