Should I buy insurance right after acquiring any property?

—Name withheld on request

Yes, you must buy insurance for your house, office or factory, after you have taken possession. Such insurance would cover your property against damages from various perils including fire, flood, earthquake and flood. The good thing is that a number of such insurances are now standardized. For example, for homes, insurers offer a product known as Bharat Griha Raksha policy. These standardized products have incorporated several of the necessary extensions such as earthquake, reinstatement value clause and waiver of under-insurance clause. So, the policy selection and buying process is significantly simplified.

The critical thing you must keep in mind is the declaration of the sum assured. This can have a significant bearing on the settlement amount for claims. You should fix the sum assured considering the estimated amount required to reconstruct the asset to bring it to similar condition before the incident.

What is a whole life policy and an endowment policy? Are these better than term cover?

—Name withheld on request

Whole life policy is a type of endowment plan. A whole life policy typically matures at the age of 100. The returns are generated by virtue of periodic bonuses declared by the insurer. If the person dies before 100, then the sum assured is paid out as death benefit.

The principal objective of the term plan is to cover the active income generating period of the individual. Most term insurance plans do that by covering individuals till the age of 65 years, the typical retirement age. If the individual survives till this age, then it is likely that they would have built a corpus to take care of their retirement and their dependents. So, their financial objectives are not dependent on the payout from term insurance.

The whole life plan works differently. The purpose of whole life insurance is to almost guarantee a death claim payout or to create a large corpus. Since the average life expectancy is well below 100, it is expected that a death claim would most likely be registered on the policy or that a large corpus could be withdrawn in the later years of the insurance. The financial planning of the individual is done in such a way that the death benefit from the policy would help take care of the financial needs of the dependent.

Since the coverage period is much longer for whole life policies, and there is a maturity benefit too, these plans are more expensive than term insurance. In most cases, term insurance is a better life cover because it does not bundle risk with investment return.

Abhishek Bondia is principal officer and managing director at SecureNow.in.

Updated: 29 Jun 2023, 09:28 PM IST