By Hemanth Gorur
Thirty-year-old Kanika was in the hunt for a cheap insurance coverage plan for well being and life protection. She had heard about bite-sized insurance policy that promised such protection at very inexpensive “per day” charges. To her shock, she discovered simply such a plan on-line that provided Rs 50 lakh of life insurance coverage and Rs Three lakh of medical insurance at a premium of simply Rs 43 per day. On the face of it, it appears to be like like she bought an excellent cope with low premium price. However, is that this one of the best she will be able to do together with her cash?
Understanding how bite-sized insurance coverage works
All insurance coverage schemes work on one precept—the misfortune of the few is subsidised by the concern of the numerous. Chunk-sized insurance coverage schemes are not any completely different. The one distinction is that they deal with particular wants of the insurance coverage seeker that may want lesser protection or premium outgo. Within the above instance of Kanika, the premium works out to a month-to-month sum of Rs 1,300.
Keep in mind that this premium is a sunk price, and is a “loss” if the insured particular person doesn’t endure any life or well being occasion. So why pay this quantity in any respect to the insurer if the identical protection will be achieved by way of your individual Do-It-Your self (DIY) insurance coverage corpus? Allow us to see how.
Constructing your individual DIY insurance coverage corpus
The month-to-month outgo of Rs 1,300 that Kanika would incur as premium expense for getting a bite-sized insurance coverage plan can as an alternative be channeled in the direction of two month-to-month investments: one for constructing a medical insurance corpus and the opposite for a life insurance coverage corpus. The medical insurance corpus is greatest achieved by an FD-RD mixture, reinvested each 5 years. The FD with month-to-month payout offers interim liquidity if required, whereas the RD retains the facility of time compounding month-to-month.
Assume Kanika must plan for the following 35 years. A sum of Rs 1.5 lakh stored in a five-year FD at 6% every year would yield Rs 750 monthly, which when channeled into an RD each month at 6% would yield a sum of Rs 52,000 on the finish of yr 5. That is along with the unique principal of Rs 1.5 lakh invested within the FD, which matures on the identical time. So, on the finish of yr 5, she would have a sum of Rs 2 lakh at her disposal to behave as a medical insurance corpus if wanted. Nonetheless, the possibilities of any well being occasion at such a younger age are fairly low, so the sum will be reinvested recursively.
The sum of Rs 2 lakh is reinvested into the same FD-RD mixture for an additional fve years. On the finish of yr 10, Kanika would have Rs 2.7 lakh at her disposal as a medical insurance corpus, which may be very near the sum insured offered by the bite-sized insurance coverage plan she thought of. Curiously, on the finish of 15, 20, and 25 years, Kanika would have Rs 3.6 lakh, Rs 4.9 lakh, and Rs 6.6 lakh, respectively. This grows to Rs 8.9 lakh and Rs 12 lakh on the finish of 30 and 35 years respectively. This could not have been attainable with an insurance coverage coverage.
Equally, to construct the life insurance coverage corpus, the second month-to-month funding of Rs 550 (Rs 1,300 much less Rs 750) will be put right into a mutual fund SIP and forgotten for the following 35 years. At simply 13.25% CAGR, this may develop to a sum of Rs 50 lakh by the tip of yr 35. Larger portfolio values in earlier years will be achieved by tilting extra in favor of fairness.
The author is co-founder, Hermoneytalks.com