Types of insurance

             As we have seen Insurance plays a crucial part in our financial planning. But any novice person thinks about purchasing insurance one main question arises into his mind. That is what kind of insurance I should buy? This is a valid question because there are so many insurance products are available in the market. From all these products we should select an insurance product as per our requirement and capacity. In this article, we are going to understand different types of insurance, which could be helpful for us to select appropriate insurance products.

Above diagram shows different insurance types let understand them one by one.

1)         Non-General Insurance:-

           Non-General Insurance includes Life Insurance and Health insurance.

A)Life insurance:-

          Life insurance deals with the risk of our life. It will provide financial security to our family after our death. It is the most important step in our financial planning which provides stability to our life. We have discussed in detail about it in Previous posts. There are different plans offered by insurance companies these are.

i)Endowment plan:-

          Endowment plans are traditional insurance plans which offer Insurance with some saving part. In this plan, we pay a regular premium in the policy period and we get life cover. along with life cover, we also get Sum assured amount with bonuses after completion of policy.

          This plan is good for accomplishing long term goals like child education, marriage or retirement.  These products offer fixed return which is lower than medium risk instruments like an Index fund, large-cap fund. But these types of products provide higher tax-free return then many of fixed income instruments.

          These  Plans are suitable for risk avers persons who don’t want to take a risk and expect higher returns than other fixed income. Many persons can consider this type of instrument as low-risk debt instrument in their financial planning.

ii)Whole life plan:- this plan is the pro version of the endowment plan . in this plan we will get life cover for the whole life. For this plan we have to pay a premium up to a certain period, many insurance companies provide Fixed benefits after the premium paying term. In this plan, either our family or we get the benefit. The family will get benefits on death while we can get benefits on completion of policy. The premium for these plans is slightly higher then endowment plans.

iii) Term insurance:-

                     Term insurance is a type of insurance that contains pure life cover. There is no saving part in these plans. We will pay some premium for life cover and insure our life for a particular period. In this plan our family gets benefits on our death only. we don’t get any amount at the end of the policy. This type of insurance has the lowest premium as it contains only life cover.

         These kinds of insurance suitable for persons who don’t want to consider insurance as saving or investment products or who don’t afford above high premium plans. Many people consider this plan as protection to their home loans so if they face some mishappening then their family could pay loans easily. We can also link these plans to our mortgage so sum assured and premium reduces over period along with loan amount.

iv)  MoneyBack Plans:-

           These plans provide us returns much time during the policy period along with life cover. Normally it depends on which plan we select. if we have 20-year the money-back policy then we could get 20% at each of 5^th , 10^th and 15^th year and get the remaining amount on maturity. Plus point of these plans is that if one has mishappening at the 18^th year of the policy then one’s family will get total benefit of policy irrespective of how much return one gets before.

v) ULIP:-

                   ULIP(Unit Linked Insurance Plan) is a mixture of insurance and investment. In this plan, we get units that we can buy or sell at any time. The main benefit of this plan is that this plan provides flexibility to buy and sell. In this plan, we can choose different asset classes in which we want to invest. This plan is similar to a mutual fund. Return on this plan is based on the performance of the asset class.

B) Health insurance:-

                             As the name suggests health insurance takes care of our hospital bills. It can cover from small medical checkup to surgeries. The main motto behind having health insurance is that we can prevent the large drain from our pocket by paying a small amount of premium.

          Premium of this insurance is based on our age, lifestyle, family medical history. We can choose a different option in this type of insurance like group insurance or family floater. In group insurance, we can take insurance of a large group it may be society or employee of the company. In the family floater type of insurance, we can take health insurance of the whole family in which we can cover the medical expenses of the family up to the sum assured amount.

2)   General Insurance:-

General insurance contains all other kinds of insurance. With the help of general insurance, we can assure our any assets like home, car, home accessories etc.

Is Their Economic Slowdown in INDIA ?

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ndia, the country which has made big Economic as well as social imprecation on the world. Many financial and economic organization believes that India will become the world third-largest economy in the world.  From last few decade economy of India have growth to 2.5 trillion dollars from 0.5 trillion dollars. Many companies in India particularly in pharmaceuticals, automobiles, Information Technologies Industries have played an important role globally.

            From the last 3 Years, India was one of the fastest-growing economies. Many people thought that India will overcome china as it reached to GDP growth of 8.2%  in previous years. But from the last few quarters, the GDP growth of India is continuously falling. In the first quarter of the year, 2019-20, India has reported a growth of 5% from 5.8 % respect to the previous quarter. This is one of the lowest growth rates in the last five years. India slipped to the seventh number of positions from the sixth one. For analyzing depth of this slowdown let’s look at some important events from past to future.

1)    Banking crisis In India:-

         The banking system is the veins of any economy. Performance of the Banking Industry will lead to a path of growth to any country. For the last many years Indian Banks are seating on a large amount of NPA’s(Non-Performing Assets). Actually, Indian banks had given loans to various businesses without analysis of their profitability, assets. And when these businesses are unable to generate profits then it will lead to twin balance sheet Problem for banks, means the liability of the business is increasing continuously and assets of banks are decreasing continuously. These lead to decreasing the liquidity capacity of banks.

        There are many big defaults had done as kingfisher airlines, Suzlon energy where banks had to struggle to recover their capital, in many cases capital is still not recovered. Also, There were many big frauds happened like Nirav Modi scam. Now the Indian Government has passed IBC( Insolvency and Bankruptcy Code )to liquidate assets of these NPA’s this code have given a big relief to  banks as it reduced NPA’s of banks to 89189 cr from 8.95 lakh cr.

2)    Liquidity crunch in NBFC companies:-

        NBFC (Non-banking finance companies) provide a very significant role in economic growth as they provide loans to purchase many products. In India, there is one Drawback in the business model of NBFC’s. these companies raise funds from the bond market and share market. The basic problem is this that NBFC firms borrow money for the short term of a period and lend them for a long term of a period like buying cars, building homes, etc. hence there are liquidity cries in these companies. They are unable to manage sufficient funds for various purposes.

      Problems in this sector start when one of the major semi-government company IL&FS(Infrastructure Lesing&Finanancal Services) defaults its payments of bond interest. IL&FS Provides fund to various infrastructure projects in India and reported that default is due to delay in the completion of projects. From that time one by one many NBFC and HFC failed their payments due to the withdrawal of these bonds. These have proceeded to consumption slowdown in various sectors. Now NBFC’s are trying to sell their loans to banks so they could overcome this liquidity crisis and manage working capital for business.

3)     Various Economic Reforms:-  

       In last some Year Indian Government carried out so many economic reforms. Absolutely these reforms are good for the Economy but, affected badly for the Indian Economy in the short term, Particularly Demonetization and Implementation have Disrupted Indian Economy. In November 2016  Indian The government had decided to wipe out notes of value  500 rupees and 1000 Rupees. This Decision had been applied so quickly that people were not got sufficient time to digest these events. By the  1000 rupees and 500 Rupees, the Indian government had wiped out 80% of its Paper currency which values more than 90% amount of currency in use. These Bold steps have impacted many small scale businesses as well as General Public, As the time of public wasted in replacing this money.

      In  July 2017 Indian government replaced the old Indirect tax system By GST. Before the implementation of GST, we have a very complicated tax system which leads to a cascading effect on tax i.e. Tax on tax. Although This is a good reform for growth in the long term, it affected badly the Indian economy. As many of unorganized business forced to become an organized one. In India, almost 60% of business was organized business and they can not cop up with these two drastic changes(Demonetization & GST).

4)    Slowdown In Automobile Industry:-

          As the Indian Automobile Industry contributes 49% share in the Indian Manufacturing Sector, it plays a major role in the growth of the Indian Economy. Also, this industry provides jobs to millions of people in India. As there is a large fall in the consumption of automobiles in India these industries facing big challenges. We have already discussed in detail about this industry in previous posts.

5)    Decreasing of Consumption of FMCG sector:-

            FMCG Sector(Fast Moving Consumer Goods) sector cames at bottom of consumption. Normally  Consumption in these sector does not affect by small disruptions, but this time many FMCG companies are reporting to fall in sales. It’s seams that consumption slowdown from the automobile industry is shifting to this sector. This is a bad sign for the economy. If we do not take some serious action then we could face a worse situation in the upcoming time.

6)    Tread war Between USA and China:-

           From the last one-year Tread war Between the USA and China is going on, and this situation will become worse due to the upcoming election in the USA. Recently the USA has imposed a 10% tariff on worth 300 billion dollars Chinese import.in response to it, china has devaluated its currency at historic low levels. Impact of tread war is such high that now china's first time in the last decade not the topmost trading partner of the USA.

        India can take short-term advantage of this situation. Because many American people prefer other goods then chines goods due to a high rate. And China was importing agricultural grains from the USA before. So in this situation, Indian companies can lake a good advantage. But in the long run, this scenario is not good for the global economy. We had seen in the past how a fight between two superpowers could affect all countries in the world. Tread war had been lead to The Great depression of 1920.

             So from the above points, we have seen how the Indian economy reacted during various events. We need to take some solid steps towards increasing our consumption growth, so we can take benefit from the USA-China trade war, and prepare to face the upcoming global Crisis.  

Emergency fund and insurance, ultimate tools to Present Assurance

Emergency fund and insurance, ultimate tools to Present Assurance

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n Money Square post we have seen the basic information of emergency fund and Insurance, let’s understand these concepts in detail.

            In the previous post we have read that Emergency fund reserve is like stored water in dam and reservoir which will help us to face extreme drought conditions, In the same way, the Emergency fund will help us to face the short term financial crisis. Many times these financial crises will impact our Insurance and Investments. The first thing we think in such situations to surrender our insurance policy or to liquidate our investments. But is this right option to liquidate our investments? Which we are investing for wealth creation. Is it right option to solve our short term problems by disturbing our long term goals? No, we should create an arrangement for such situations, so our investments can do their work properly. Let’s take one example for understanding the importance of Emergency fund.

             few years ago I had read one news in newspaper-it was the story of a youngster. He had great academic records, he was always ranker in his school. After he completed his degree from a top university and got a job in the USA with seven-digit income. Further, he had married and settled in the USA. Everything was going nicely. A good job, two children, a good job. They were enjoying their life. But suddenly the bubble in the global economy had busted. That was the Sub-Prime crisis in the USA. Number of big companies collapsed overnight. Many companies cut jobs for surviving in this crisis. He also lost a job in this crisis. From that day his suffering was started. He was searching for a job all day and came home at night with a lot of rejections.  After a few days family could not meet their day to day expenses. His land lower ask them to leave the apartment as they failed payment of rent. He and his wife were very frustrated with this condition and finally  3 days before the date to leave the apartment whole family committed suicide.

            Question is that why had four innocent people lost their life? Could they avoid to take this horrible decision? Here we can understand the importance of the Emergency fund. What if he had maintained an emergency fund equal to his expences of 6 months?  He could get more time to find a solution to this problem. And this is only one news, what about a number of people who suffered that event.

            Today also there is a slowdown in India, in the Automobile and other industries millions of people losing their jobs. In such situations, the Emergency Emergency fund could play a significant impact. It could save our insurance and investments.

Insurance:-

            We can consider insurance as the security of our present for the long term. Many people prefer investment before insurance. Suppose one man saving  Rs 15,000 monthly. He could get an annual compounded return from 12% to 20% according to risk. By the above formula, he could create large wealth in 25 to 30 years for him and his family. What will happen if he faces some mishappening?  Will this assumed investment give to the family? And is that amount that will be sufficient for the family to maintain their standard of living? In such a case, insurance will play an important role.

            We should consider all the above factors at the time of financial planning.we could build big skyscrapers if the foundation is strong, Life and health insurance are the foundation of our financial planning. life insurance will give ous security by which we can live tension-free life and able to take higher risks on investments, which could increase our returns amazingly.

            Many people take insurance for reducing their taxable income. Many people take insurance for saving. But is that the right purpose of buying an insurance policy?no, we should consider different factors while buying insurance. If you have X income annually so we should purchase insurance such that the amount of insurance could generate X income after us. Our family could invest  Insurance amount in fixed income instrument to get returns of 4 to 10% for that purpose. That means if we consider a 5% interest rate then we need to take insurance which gives 20X after our death. So our family could live tension free life.

            We could get different riders along with the base policy. We could buy a term rider to get an additional benefit. We could get an Accidental death rider in which our family will get an additional amount in case of accidental death. we could get a critical illness rider to get a fixed amount on critical illness case.we to have many options in life insurance. In health insurance, we can cover the drain of our pocket in case of a medical emergency.

            So in this way, Emergency fund, and Insurance build the foundation of our financial planning. and everyone should make provisions for that before further proceeding into financial planning.