How To Choose The Right Insurance Plan As per Need

As we studied in the first chapter, there are different types of insurance plans. Amidst these plans, how do you choose the right one to fit your needs? 

Deciding on the right insurance plan can be as confusing as trying to solve a puzzle. Is it okay to just go with what your friend picked, or should you listen to what your agent recommends? The real answer is closer to home than you might think. 

It’s all about understanding your own financial needs and situation. Before we dive into picking the perfect plan, let's start with the basics: figuring out where you stand financially. This chapter will guide you through this process, step by step, in simple terms, ensuring you’re on solid ground to make the best choice for yourself and your loved ones.

Understanding Your Financial Situation

The first thing to do before choosing from the different types of insurance plans is to assess your financial standing. To do so, you need to look at the following things -

• Your aggregate monthly income
• Expected expenses per month. Include your lifestyle expenses, household expenses, and also any debt repayments that you do.
• Existing assets or investments.
• Existing liabilities 
• Number of dependents
• Your financial goals - child’s higher education, wedding, buying a home or a car, planning for retirement, etc.

Once you know your financial situation, you can assess which insurance plan you need. 

Types of Insurance Coverage 

To recap the first chapter, here are the different types of insurance plans that you can choose from -

• Life Insurance 
• Health Insurance
• Motor Insurance 
• Travel Insurance 
• Home Insurance 
• Commercial Insurance, etc.

Choosing the Right Coverage 

Now that you have refreshed your memory about the types of insurance plans, here’s how to choose one based on your financial needs -

• Life Insurance 

A life insurance plan is suitable for every individual. Wondering why?

Because of the coverage that the plan provides. The plan covers the risk of premature demise, a concern for all. In the case of the premature demise of the breadwinner, the family loses their source of income and suffers a considerable financial loss. A life insurance policy covers this financial loss and is an essential financial planning tool for everyone. 

Here’s how to choose the right plan basis your financial needs -

Term insurance	Suits every individual since it offers basic coverage against the risk of premature demise
Endowment or money back insurance	Provides insurance coverage against the risk of premature demise and also offers a maturity benefit if you survive the tenure. If you want to create a corpus for your financial goals, it is a suitable choice
Child plans	Suitable for creating an earmarked corpus for your child’s future financial needs
Unit Linked Insurance Plans (ULIPs)	Suitable for individuals looking for insurance and investment in one plan
Pension plans	Suitable for creating a retirement fund and also to ensure pension payments after retirement

• Health Insurance

A health insurance plan is also a universal requirement for individuals since it covers expensive medical bills and gives financial security. 

You can choose from the following health plans -

Indemnity health plans	Cover hospital bills and are suitable for all
Senior citizen health plans	Suitable to cover senior citizens
Top-up health plans	Suitable to enhance an existing health plan coverage at affordable premiums
Critical illness health plans	Suitable if you want a lump sum benefit in the case of a critical illness

• Travel Insurance 

Travel insurance plans are suitable if you are going on a trip for business, leisure or even as a student for higher education.

You can buy the policy to match your trip duration and get coverage against possible financial emergencies, including medical emergencies and hospitalisations. 

• Motor Insurance

A motor insurance policy, or specifically a third-party insurance policy, is mandatory under the provisions of the Motor Vehicles Act of 1988. So, if you have a vehicle, whether a two-wheeler or a four-wheeler, you must get it insured under a valid motor insurance policy.

• Home Insurance 

A home insurance policy is suitable for homeowners who want to protect themselves financially against the risk of damage to the house and/or its contents. 

Risk Tolerance in Insurance

When it comes to insurance plans, there’s no specific risk per se. You buy a plan to get coverage against a financial risk that you face.

That being said, when it comes to life insurance plans, especially ULIPs, you must assess your risk tolerance level before investing. 

ULIPs are market-linked insurance plans that invest your premiums in a choice of funds. Each fund invests in market-linked securities, and the returns depend on the performance of such securities.

As such, when investing in ULIPs, you must choose a fund based on your risk tolerance level. Here’s how -

• If you have a high-risk appetite - Choose equity-oriented funds
• If you are risk-averse -Choose debt-oriented funds
• If you have a moderate risk appetite - Choose hybrid or balanced funds

Alternatively, endowment or money-back life insurance plans would be a better choice if you want to avoid market risks. These plans do not expose your investment to the market and offer assured returns.

Emergency Fund

Emergencies are uncertain, and, more often than not, they have financial implications. While you cannot avoid emergencies, you can plan for them. Building an emergency fund is recommended to be financially prepared for emergencies.

Insurance plans help create an emergency fund for the different types of emergencies you might face. You can also set aside 3-6 months’ income in a liquid corpus for other emergencies not covered by insurance plans.

Reviewing and Adjusting Coverage

A regular review and adjustment is needed after you assess your financial needs and choose suitable insurance plans. This ensures that your insurance plans are suitable and optimal to cover your ever-changing financial needs.

To review your coverage, check whether the coverage amount is sufficient enough to fulfill the targeted financial needs. If the answer is ‘No’, it's time to enhance the coverage amount. You can do so in your existing plan (if allowed) or buy a new policy to increase the coverage.

Check and review the coverage of your life and health insurance plans. Ensure that the coverage is sufficient for your changing needs. Also, factor in inflation as it tends to increase the underlying costs for which higher coverage is needed.

Wrapping Up

Don’t buy an insurance policy without doing your research and assessing your needs. Start with assessing the financial risks that you face so that you can choose the relevant plans that cover such risks.

Once you have shortlisted the type of plans that you need, compare the available plans in the market. Choose plans that provide an inclusive scope of coverage at the most competitive rate of premium. 

Secure your financial risks under suitable insurance plans and get peace of mind. After you buy insurance, know how to manage and maintain your insurance plans to utilise their fullest potential. The next chapter talks about maintaining your insurance policies. Check it out to understand how to maximise the benefits of your insurance policies.