Get Your Insurance Portfolio Right

Covid-19 infections are on the rise again. Many of us are under great stress for various reasons. A series of “What ifs” constantly overwhelm our minds. During such times, it is easy to appreciate the importance of adequate insurance in our portfolios. An insurance plan helps you ringfence your finances from potential shocks. In fact, when it comes to financial planning, getting your insurance portfolio right is far more important than getting your investments right. This is because you may not get a second chance with insurance.

In this post, let us look at some of the common insurance plans that everyone should have.

#1 Life Insurance

You are taking care of regular expenses of the family, paying EMIs and investing for various goals including kid’s education and your retirement.

What if something happens to you? Will your family be able to manage all such expenses, EMIs and investments on their own? If the answer is no, you need to buy a life insurance plan.

While the pain of losing a family member cannot be done away with, your family can avoid financial agony if you buy a proper life insurance plan. And buying any life insurance plan will not do. You need to buy the right plan with adequate coverage. And this is the unfortunate part.

Many of us buy several life insurance plans. Yet, we do not have adequate life insurance coverage. This happens because we buy the wrong type of life insurance plans. We invest in traditional life insurance plans and ULIPs. We can always argue about merit and demerits of ULIPs and traditional plans as investment products. However, such plans are not the best way to purchase life insurance.

Since the insurance coverage in ULIPs and traditional plans is linked to the premium you pay, your premium payment ability will affect your life insurance coverage. For instance, you must pay an annual premium of Rs 5 lacs to get life cover of Rs 50 lacs in a ULIP.

Now, how many of us can pay Rs 5 lacs per annum for life insurance premium? If you cannot afford Rs 5 lacs, what do you do? You reduce the annual premium to say Rs 1 lac and the life insurance cover goes down to Rs 10 lacs. Will Rs 10 lacs be sufficient for your family in your absence? Likely not.

By the way, I am not saying Rs 50 lacs life cover will suffice for you. You need to figure out the right life coverage amount. There are many ways to assess your insurance requirement. Here is one way to look at things.

Your existing assets + Your life insurance cover should be enough to

  1. Square off your loans
  2. Meet all your financial goals
  3. Provide for regular expenses of the family for the foreseeable future.

Coming back, a term insurance plan is the best and the cheapest way to buy life insurance. A term life cover of 50 lacs for a 30-year-old person will cost 7-8K per annum (compared to Rs 5 lacs for a ULIP). Quite affordable.

Whether you buy traditional plans or ULIPs or a term plan, it is your responsibility that you have adequate life insurance coverage.  If you see merit in traditional plans and ULIPs and can afford high premium, you can go with such plans. OR just keep it simple. Buy a term life insurance plan of adequate amount.

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#2 Health Insurance

Hospitalizations can be expensive. In absence of a health insurance plan, a prolonged hospitalization for you or any family member can severely dent your finances. A health insurance plan ensures that you can provide quality healthcare to the family for a long period.

You may be covered under a group health plan from your employer. However, your job is not over.

  • You need to see if the coverage is adequate. Rs 5 lacs for a family of 4 in a metro city is unlikely to be enough. Usually, you do not have flexibility in choosing the coverage. You take what you employer offers.
  • This coverage is only as long as you are with your current employer. The coverage ceases when you quit your job. What happens when you are in middle of a job switch or when you retire?
  • It is easy to buy a health insurance plan when you are young and healthy. As you grow older, your propensity to contract an illness increases. And once you have a serious illness, it becomes difficult or sometimes prohibitively expensive to buy a health insurance plan. My limited experience suggests insurance companies are not very keen to accept such applications.

So, if you think you will buy private cover after you retire, do consider such aspects. In my opinion, buy while you easily can.

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#3 Disability Insurance

Life insurance takes care of the family if you are not around. Health insurance provides for hospitalization costs and pre-hospitalization and post-hospitalization expenses.

What happens if an accident leaves you disabled and compromises your ability to earn? Life insurance will not pay because, well, you are alive. And health insurance will take care of only the hospital bills. What about the loss of income due to disability in an accident? That is where a personal accident plan comes in.

You can buy disability insurance (personal accident plan) in two ways:

  1. As a rider with a term life insurance plans (cheap but covers only permanent and total disability)
  2. As a standalone plan (expensive but comprehensive. Covers both partial and total permanent disability).

In addition to the above three insurance plans, you can augment your insurance portfolio through critical illness insurance plans, disease specific insurance plans (Covid-19 related, cancer etc). If you own a house, you can buy a home insurance policy to protect against burglary and damage to the structure due to fire or earthquake.

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