Why do we purchase insurance? Well, the answer is simple. You purchase insurance to guard against the impact of a particular event on your family’s finances. That event could be death, illness, disability or damage to expensive belongings. You don’t insure your pen or clothes but you insure your car. Why? This is because loss of a pen or a few clothes wouldn’t affect your financial health badly. However, you will have to shell out a lot to repair the damages to your car.
What do you insure and what do you not insure? You don’t need to insure against events that won’t impact your financial position badly. For the events that do, you must try to purchase insurance. So, identify all the events (or risks) that can put your finances or your family finances in jeopardy. And then, figure out a way to contain the financial impact of such risks.
In this post, I will discuss a few types of insurance plans that everyone should have in their insurance portfolio.
Well, there is nothing much you can do in preventing death apart from going for regular health checkups, accessing quality health care and exercising caution in general. An early demise (of an earning member) can put serious strain on family’s finances. By purchasing adequate life cover, you can ensure that your family’s finances are taken care of even when you are not around. Life cover cannot reduce the emotional pain due to demise of a family member but can certainly ease the financial burden.
How much life cover do you need? This question probably requires another post to answer. However, the life cover (Sum Assured) should be enough to square off all your outstanding loans, maintain desired lifestyle and provide for all the financial goals and milestones such as children education and marriage, spouse and parental care etc.
Do not mix investment with insurance. Under investment and insurance combo products such as Unit Linked Insurance Plans (ULIPs), endowment or money back plans, the Sum Assured is linked to the premium amount. So, the amount of life cover that you can purchase gets limited by your premium payment ability.
For instance, after doing due diligence, you conclude that you need a life cover of Rs 1 crore. Let’s consider a ULIP that provides life cover that is 10 times the annual premium. Now for a life cover of Rs 1 crore, you need to pay an annual premium of Rs 10 lacs. How many of us can afford this kind of premium? I know a few people who first decide the premium that they can afford, which in turn decides their Sum Assured (Life cover). So, your premium paying ability decides your life cover. However, the amount of life cover should not depend on your premium paying ability. If your family needs Rs 1 crore if you are not around, they need Rs 1 crore. There is not much to argue about.
Purchase adequate life cover. Term life insurance is the best and cheapest form of life insurance. Now contrast the premium amount with that of a term life plan. Depending upon your age and health condition, you should get good options in the range of Rs 10,000-Rs 15,000 per annum.
Less I talk about traditional life insurance plans, the better. Traditional Insurance plans (the types that the LIC sold to our parents) are neither any good as insurance products, nor any better as investments. These plans are detrimental to one’s financial health and must be strictly avoided. Do note LIC is not the only one selling such plans. All the private insurers sell such plans too.
An additional point to note: Term insurance plans pay in lump sum. However, your family’s financial requirements won’t be lump sum. They will need regular income. So, if you feel your family may not be in a position to generate regular income from the lump sum payment, you are better advised to go for Income Replacement Term Insurance Plans. These plans are variants of term insurance plans only. However, rather than making the lump sum payment, these plans make monthly payments over a specified term. Under some variants, you even get the option of getting income that is adjusted for inflation.
Under health insurance, the insurance company will cover the costs of medical treatment in case you (or any family member) were to get hospitalized. Health insurance is necessary because the cost of quality healthcare has been rising very fast. A prolonged hospitalization can seriously dent your finances. An adequate health cover ensures not only that your finances do not take a hit but also that you do not have to compromise on the quality of health care for your family. You can purchase an individual health plan (that covers only you) or you can opt for a family floater plan (that covers your entire family).
Health insurance plans are not as easy to understand and compare (as compared to life insurance plans) as the insured event is not so crisp. For instance, certain kinds of treatment may be covered while others may not be covered. The extent of coverage varies across plans. Typically, the better the extent of coverage, the higher the premium for a health plan. So, you need to put in some sincere effort while selecting a health insurance plan.
A number of you who work in the organized sector may have health insurance from your employer. However, the Sum Insured may be limited. A health cover of Rs 3 lacs for a family of four in Mumbai is certainly not enough. You don’t get to decide the cover. Your employer does. Moreover, employer health cover is valid as long as you are with the same company. In case of job loss or job switch, you may be without health cover. Additionally, the employer plan may have several limitations such as room rent sub-limits. In such cases, the insurance company may not cover the kind of treatment that you want to opt for.
In my opinion, you must purchase a personal health insurance plan in addition to your employer health cover.
Personal Accident Cover / Disability Cover
Life insurance provides support to your family in case of demise. Health insurance avoids a dent to your finances in case of a prolonged hospitalization. However, how about a scenario where an accident renders you temporarily or permanently disabled. This may also compromise your earning ability. Moreover, there may be additional expenses for own care to be taken care off.
Life Insurance Company won’t pay since the insured is still alive. The health insurance company will cover hospitalization expenses up to Sum Insured. What if your earning ability gets compromised due to the accident? Life and health insurance do not cover such events. Hence, there is a gap in your insurance portfolio even when you have life and health insurance. It is in such cases that personal accident covers can come to your rescue. Payout from personal accident covers happen when an accident results in death or disability. The premium for such plans depends on the nature of your occupation. Riskier the profession, greater your chances of getting injured during work and hence higher the premium. So, the premium will be higher for a builder than the premium for a doctor. The premium is comparable to that of a term plan. Alternatively, you can purchase accidental disability rider along with your term insurance plan.
Home Insurance (or Property Insurance)
You have put almost all your life’s savings in purchasing a dream house. What will you do if your house gets damaged due to flood or an earthquake? Home insurance, as the name suggests, covers damage to the structure due to perils such as flood, fire, earthquake and lightning. You can also cover damage to your belongings under home insurance. In fact, you can cover damages due to burglary and theft too due to add-on covers. There are many things to be taken care of while purchasing home insurance. Since the probability of occurrence of such events is quite low, the premium for such plans is quite low too.
Among the list of insurance plans discussed in this post, this is probably the only insurance that is mandated by law. If you own a motor vehicle, you must purchase third party insurance. Essentially, if you happen to cause damage to someone (or his/her vehicle) while driving your vehicle, the insurance company will cover such expenses. However, most of us purchase a comprehensive motor insurance plan (and not just third party insurance). In fact, you will find it extremely difficult to purchase only third party insurance. Insurance companies do not want to sell third party insurance alone as it is a loss-making business for them.
Motor insurance is important since it covers expenses to repair the damage to your car or two-wheeler in an accident. Insurance company also pays up when your car gets stolen. You can purchase add-on covers that cover accessories too. Do understand that a car or a two wheeler is a depreciating asset. Hence, the amount of coverage (Sum Insured or Insured Declared Value) keeps going down year after year. So, if your car gets completely damaged or stolen in the first year after purchase, the insurance company will pay you an amount closer to ex-showroom price. However, if the car gets stolen after 3 years, you won’t get anything closer to the price of a new car.
Insurance cannot take the emotional trauma that you and your family go through in case of an adverse event. However, it can help take care of the hit to your finances. Here is the list of major risks and the insurance plans to cover the financial impact on occurrence of such risk events.
|Personal Accident Cover,
Accidental Disability Rider with Term Plan
|Damage to your House or expensive household items
|Damage to your motor vehicle