Protecting Your Wealth

Abhinav Rajverma
 Topics: Protecting Your Wealth

1.Life Insurance
2.Health Insurance
3.Property Insurance
4.Liability Insurance

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 Introduction
The need for both Life and Health Insurance arises from the
principle Protect Yourself Against Major Catastrophes.
Health Insurance
 Protection to self and family against financially devastating
medical bills
Life Insurance
 Protection to family if one dies

Planning and Control

If you plan carefully enough, you can control your finances even
after your death.

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 The Importance of Insurance

 Most of us avoid thinking about and planning for our deaths –

most of us do not seek out a life insurance policy.
 When you consider your need for insurance, you need to keep
in mind its purpose.
 An insurance policy spells out what losses are covered, what
the policy costs, and who receives payment.

Health Care Is Expensive

No incentive to economize
Medical care extremely sophisticated – drugs development
High malpractice insurance costs

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 Life Insurance

Life Insurance is sharing financial consequences of risk by

paying a premium (risk pooling).
Nominee – beneficiary designated to receive the proceeds
Make no sense without a spouse/partner or dependents

You probably need life insurance if:

You have children
You have dependents
You own a business – business debt

Need Life Insurance?

How Much Do You Need?

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 How Much Do You Need?

Earnings Multiple Approach

 Normally, five to fifteen times your gross salary is recommended
 Most insurance companies will not insure an individual for more than
twenty times his or her annual income
 The goal of this approach is to replace the primary breadwinner’s salary
for a predetermined number of years.

How Much Insurance One Needs

Step 1: Adjust the pre-incident salary down to compensate for the
reduction in household expenses = Target replacement salary (TRS)
Step 2: Get the appropriate interest rate (post-tax and inflation-adjusted)
Step 3: Calculate the Earnings Multiple for life insurance
Step 4: Calculate the life insurance needs = TRS * Earnings Multiple

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 Example: Life Insurance Needs

Example: Current Annual salary = Rs. 10 lakh; Inflation-adjusted post-

tax return = 2%; Calculate the life insurance needs for 10 years for a
surviving family of three. Assume expenses for three is expected to reduce
by 20%.
Solution:
Step 1: Target replacement salary = Rs. 10 lakh * (1 – 20%) = Rs. 8 lakh
Step 2: Interest rate (post-tax and inflation-adjusted) = 2%
Expense coverage for 10 years
Step 3: Earnings Multiple for life insurance =
Step 4: Life insurance needs = TRS * Earnings Multiple

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 Life Insurance Needs – Other Methods

Financial Needs Approach

Short-term needs (+)
Long-term debts (+)
Family maintenance expenses (+)
Resources available to meet needs (-)
Human Life Value Approach
 Human life value (or economic value of a life) is the present value of
the future earnings potential of that person.
 The amount of insurance needed will equal how much the insured
person will earn until retirement.
 Function of current after-tax income, income growth rates, an after-
tax future investment returns, remaining number of years the insured
person is expected to work

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 Example: Human Life Value Method

Example: Mr. John aged 40 years, draws an annual salary of Rs. 10

lakh. His personal expenses are Rs. 4 lakh per annum that includes taxes,
insurance premium, etc. Assuming retirement age of 60 years and
expected rate of return being 8%, estimate human life value of Mr. John.
Solution:
Step 1: Surplus Income = Rs. 6 lakh per year
Step 2: Working Span = 20 years
Step 3: Get the PV of 20-year annuity = HLV

Net Rate for Growing Annuity =

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 Life Insurance: Major Types
Term Insurance
Protection for a specified time period
Least expensive; premium increases over time
Fixed death benefits
No cash value
Cash-value Insurance: Insurance + Saving
 Whole Life Insurance
 Unit Linked Insurance Plan (ULIP*)
 Child Plan
 Endowment Plan
 Money Back Plan
 Retirement Plan
 Group Insurance Plan
*CG tax on any income if Annual Premium is more than Rs. 2.5 lakh

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 Important Clauses

Contract Clauses
 Free Look Period
 Grace Period
 Revival clause
 Loan Clause
 Payment Premium Clause
 Suicide exclusion
 Life assured dies by suicide within 12 month
 Reasonability clause
 Reasonable charges in the same geographical area for
similar or identical service
 Indisputability clause
 Ensures that insurers do not arbitrarily dismiss claims on
grounds of inaccurate declaration by the policyholder

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 Riders and Payout Options

Riders: Enhanced protection and coverage benefits

 Accidental Death Benefit
 Permanent Disability
 Waiver of Premium
 Critical Illness
 Accelerated Death Benefit
 Income Benefit

Payout Options
 Lump sum payout
 Periodic Payouts
 Lump sum payout with regular income
 Lump-sum payout with increasing income

Which settlement should you choose?

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 Health Insurance

Health insurance is a contract where an insurance company

provides medical coverage. Medical coverage includes
hospitalization, surgeries, day care procedures, etc.

Major Types
 Individual Health Insurance
 Family Floater
 Senior Citizen
 Critical Illness

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 Property Insurance

Property insurance provides protection against most risks to

property, such as fire, theft and some weather damage.
Need to prepare for unlikely, unlucky events.
How much and what kind of insurance to buy is a challenge.

Types of Insurance Coverage

 Replacement cost
 Repairing or replacing property at the same or equal value
 Actual cash value
 The replacement cost minus depreciation
 Extended replacement cost
 More than the coverage limit if the construction costs have gone up

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 Liability Insurance
Liability insurance provides protection against claims resulting from
injuries and damage to other people and/or property
 Legal costs and payouts – insured party would be found liable.
 Not covered: Intentional damage, contractual liabilities, criminal
prosecution
 Liability insurance a must for vehicle insurance policy

Types of Liability Insurance

 General Liability
 Bodily injury and property damages
 Reputational harm; Advertising errors
 Professional Liability
 Negligence; Misrepresentation
 Violation of good faith and fair dealing
 Employer Liability
 Workers’ compensation if employees get injured or sick because of their
job
 Product Liability
 Third-Party Liability 15
 Summary

 Life insurance controls the financial effect on your family

when you die.
 There are two types of life insurance – term and cash-value.
 Basic health insurance provides combination of hospital,
surgical, and physician expense insurance.
 Major medical expense insurance covers medical costs not
covered by basic health insurance.
 Property insurance and liability insurance

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Thank You
for
Your Time

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