All insurance schemes work on one principle—the misfortune of the few is subsidised by the fear of the many. Bite-sized insurance schemes are no different.

By Hemanth Gorur

Thirty-year-old Kanika was in search of a cost-effective insurance plan for health and life coverage. She had heard about bite-sized insurance plans that promised such coverage at very affordable “per day” rates. To her surprise, she found just such a plan online that offered Rs 50 lakh of life insurance and Rs 3 lakh of health insurance at a premium of just Rs 43 per day. On the face of it, it looks like she got a very good deal with low premium cost. But, is this the best she can do with her money?

Understanding how bite-sized insurance works
All insurance schemes work on one principle—the misfortune of the few is subsidised by the fear of the many. Bite-sized insurance schemes are no different. The only difference is that they focus on specific needs of the insurance seeker that may need lesser coverage or premium outgo. In the above example of Kanika, the premium works out to a monthly sum of Rs 1,300.

Remember that this premium is a sunk cost, and is a “loss” if the insured individual does not suffer any life or health event. So why pay this amount at all to the insurer if the same coverage can be achieved through your own Do-It-Yourself (DIY) insurance corpus? Let us see how.

Building your own DIY insurance corpus
The monthly outgo of Rs 1,300 that Kanika would incur as premium expense for buying a bite-sized insurance plan can instead be channeled towards two monthly investments: one for building a health insurance corpus and the other for a life insurance corpus. The health insurance corpus is best achieved by an FD-RD combination, reinvested every five years. The FD with monthly payout gives interim liquidity if required, while the RD retains the power of time compounding monthly.

Assume Kanika needs to plan for the next 35 years. A sum of Rs 1.5 lakh kept in a five-year FD at 6% per annum would yield Rs 750 per month, which when channeled into an RD every month at 6% would yield a sum of Rs 52,000 at the end of year five. This is in addition to the original principal of Rs 1.5 lakh invested in the FD, which matures at the same time. So, at the end of year five, she would have a sum of Rs 2 lakh at her disposal to act as a health insurance corpus if needed. However, the chances of any health event at such a young age are quite low, so the sum can be reinvested recursively.

Reinvesting recursively
The sum of Rs 2 lakh is reinvested into a similar FD-RD combination for another fve years. At the end of year 10, Kanika would have Rs 2.7 lakh at her disposal as a health insurance corpus, which is very close to the sum insured provided by the bite-sized insurance plan she considered. Interestingly, at the end 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 at the end of 30 and 35 years respectively. This would not have been possible with an insurance policy.

Similarly, to build the life insurance corpus, the second monthly investment of Rs 550 (Rs 1,300 less Rs 750) can be put into a mutual fund SIP and forgotten for the next 35 years. At just 13.25% CAGR, this would grow to a sum of Rs 50 lakh by the end of year 35. Higher portfolio values in earlier years can be achieved by tilting more in favor of equity.

The writer is co-founder, Hermoneytalks.com