EVERYONE talks about the importance of being insured. While the debate is pertinent, are we also being taken for a ride by some insurance agents? Today the insurers offer a suite of products which talk about covering every walk of your life. While many are nice to have, the relevant question would be to arrive at the must-haves. This article gives you a run down of the ideal mix of insurance policies that is the need of the hour.
1) Term insurance
If you are young and unwilling to make big financial commitments -go in for a pure term cover. It would provide basic risk protection for a period ranging from five to 20 years or even more. The sum insured will be payable to dependants on death of the policyholder. But if the policyholder survives till the maturity of the policy, there are absolutely no monetary benefits. How to take a term cover? You can take a policy at a young age; it works to your advantage. Premium at this stage is lesser and it is fixed throughout the tenure of the policy. If you opt for Rs 5 lakh cover at the age of 25 (without any riders) your annual premium works out to around Rs 1,375 for the entire term of the policy. If you opt for the same risk cover at the age of 35, it works to around Rs 1,575 for the whole term of the policy. This difference of Rs 200 every year for a period of 20 years could work out to a hefty term. So think smart and start early.
One can get a higher risk cover as the premiums are very low for term policies. Ideally, the tenure should also be long (till 60 years) as the cost of buying a policy later is much higher. One could also consider topping up as income and risk proportion rise. Ideally, one should evaluate insurance need every now and then working in tandem with wealth creation. Over and above the basic life term cover; there are additional riders like accidental death and critical illness which come at additional premium. The accidental death benefit rider, as the name suggests, covers you for the risk of death due to an accident.
Similarly, the critical illnesses rider provides you for the risk of death from a life threatening disease like heart attack etc.
Whether you want to opt for these riders or not is an individualistic decision because it comes with an extra cost. For example, if you are surviving from critical illness and you have a mediclaim, a critical illness cover is almost compensated for. Further, if the critical illness leads to policy holder’s death, then the life insurance comes into play. So depending upon your affordability, you can decide if you want to sign up for the additional riders.
How much insurance do you need?
While arriving at the sum assured figure, there are multiple factors to be looked into.
Firstly, the extent of income dependency in your family, which implies higher the dependency, higher should be your risk cover.
Secondly, the liabilities you need to cover. For example, if you have an outstanding loan amount of Rs 5 lakh for the next 4-5 years then a sum assured of at least the same amount is required.
Third is asset creation. If you have created substantial assets for your family, that will take care of their financial requirements even without an insurance policy.
According to financial planners life cover should be 10 times the earning ability of the individual. This is to maintain the current life style for 10 years in case of policy holder’s death.
2) Medical insurance
Tax break is often the reason why many people buy medical insurance policies. But then can anyone ignore the spiraling medical costs which make a medical cover necessary? Even in this case, it might be prudent to start early. It has been noticed that insurers cover pre-existing diseases after completion of five years of the policy. So starting early in that sense when you enjoy better health condition could work to your advantage. You should at least opt for Rs 3-4 lakh cover per person in metro cities like Mumbai, Delhi, and Bangalore etc. You can probably look at a cover of Rs 2-3 lakh per person in tier two towns given that medical costs are still lower in these areas.
3) Accident insurance
This is a less popular, but arguably one of the most important, as it covers the risk of disability due to an accident. As all accidents don’t result in death, a policyholder may suffer from some permanent disability, which could lead to loss of income. This policy covers death due to an accident or damage of any body part. It doesn’t really pinch your pocket to take an accident cover because it comes at lower premium. An accident cover of Rs 5-10 lakh risk cover is a reasonable sum.
Insurance is not an investment
There are various products in the market, which combine the protection part of the insurance cover and also have an investment side to them. There are various avenues in the market which generate good returns.
Financial planners say you should look at insurance as a cost of life and not try to make any investment out of it. So plan your investment and insurance separately.
