India is an under insured country – across the board, life, medical, property or others. The only area where insurance penetration is high is with vehicle insurance without which you won’t get the registration. Let us look at each category to find out your insurance requirement, in the order of importance
Yes, people think Life Insurance is the most important, but no, Medical Insurance rates higher. Insurance starts with you for you. Life insurance benefits your dependants, not you.
As we age, our health expenses increase and hence every one must have a medical insurance. Fortunately for salaried employees, most companies provide coverage under group policy. Moreover, the terms and conditions are favorable for you. However, self-employed and others need to have enough coverage and need to start early.
A person needs a coverage of at least 5-7 lakh to cover medical expenses, in the current environment, where private hospitals are the preferred option. They are increasing much faster than inflation as investors want to milk the hospitals for investment returns. So your medical insurance should double every 7 years broadly
Do’s and notes:
- Prevention is better than cure. Maintain your health and don’t abuse your body. All those who think they can give up their 70’s and 80’s to enjoy 20’s and 30’s don’t last even for 40’s and 50’s
- Do some form of workouts. Check out 5Bx. You can definitely spare 11 minutes a day for your health
- Take insurance while you are young when
- The premiums are lower
- Holding periods for the specified diseases will get finished before you actually need the insurance
- You still are not diagnosed with diabetes
- Take insurance via a good and reputable Third Party Administrator (TPA). Most of them are brokers who sell policies and also act a liaising agent on your behalf helping you with the claims process. Dealing directly with the insurer is a painful process; they typically give you some toll free number and you would be frustrated repeating the story all over every time you call them. The TPA will assign you a relationship manager who is supposed to be a single point of contact for your claims and queries
- Claiming medical insurance from employer
- Ensure, you know the process, and keep the contact numbers ready in case you need to use your corporate insurance by your employer
- Ensure you provide details of your dependents – parents, spouse's parents in the intranet/third party portals. Typically there is only a short window to add details. Missing this step out of negligence can prove costly later
- Print out the applicable Insurance I-cards and keep them ready
- Use your company policies to cover your parents; they may have favorable and cheaper than market ones
- Check co-payment terms for your parents
- Premiums (as of current scenario) increase drastically once a person crosses 55. Ensure your parents are insured before they reach 65; post which most companies don’t provide insurance. Existing insured ones can renew until they reach 80
Life insurance ensures, your dependents aren’t adversely affected financially in case of your death. A good coverage will help your dependents sustain their lifestyle before they can get to a point of self sufficiency. The most adversely affected persons are your children. A good coverage should provide for
- Provide for living, education and other expenses from the interest received from the bank at least for next 10 years
- All your outstanding loans
Simple way to calculate:
No of dependants x Avg expenses per person / 10 year Govt. Bond Yield + total debt outstanding (including home loan, personal loans etc) + Education expenses for children till their college + marriage expenses for your daughter
Say I live in Bangalore, have a non working wife and two kids and two elderly parents, the way I calculate is
(3 x 2,0000 + 2 x 30,000) x 12/7.5% + 50 lakh (home loan and others)+ 12 x 2 x 2,00,000 (education for two for 12 years with 2 lakh on average (approx.) + 50 lakhs (miscellaneous) = 3.5 Crores
You can adjust (decrease or increase) the coverage if
- Your spouse is working
- Parents have medical coverage and receive pension
- You have accumulated assets which can survive your family
- You are likely to be a diabetic, which is so endemic now
- You smoke and drink which will certainly make your life riskier
The trade off is the premiums you pay vs. the coverage. You can stagger the coverage if you think the premium is too high. One needs less coverage when young, increases once you are married and have kids, and reduces after your kids graduate from college when they can manage themselves. So you could take a crore coverage now, add another two crores after 5 or 10 years. This is a more advisable plan, however, if you are diagnosed with diabetes by then, the premiums will shoot up. The choice is yours
Do’s and notes:
- Take term policies for 30 years
- Insure early when you are young and healthy
- Specify if you smoke, it will increase your premium, but better be correct than hide and give a chance for the insurer to reject your claim
- Stop taking endowment policies which insure you for 5 lakhs or 20 lakhs for a lakh premium annually. Do you really think such tiny coverage would really help your family in case of your death?
- Don’t try to save on premiums or recover them via investment cum insurance plans. Insurance is meant to give your dependents huge sum in case of an unforeseen event, in lieu of the small premiums paid periodically. Insurance is not an investment
- While selecting for a policy, go with an insurance company with
- Trust-able agents who will help your family to claim the amount; typically a relative or a friend who is an insurance agent
- Good claims settlement ratio, higher the better
- Check for consumer complaints and general legal cases against them; just google it for reviews, don’t need elaborate research
- Have enough offices and contact points to talk to, if any disputes
- Have been a longer player in the industry
Home loan Insurance/ Education loan insurance/ Personal Loan Insurance
Typically banks add an insurance component when you take loans. If you already have adequate insurance, you can assign the policy for the loan outstanding amount. You don’t need to pay additional premium to cover the loan. Also most people prepay education loans and personal loans, before the term of the insurance policy. Note the policy numbers / file the policy documents so that these can also be claimed.
Insurance requirement reduces as the life of the asset decreases. Say a car, post two three years after purchase, don't fetch you if your sell it. Even if you insure for a higher amount, the insurance company is going to pay only the replacement value, not the amount you've insured for.
So, renew the insurance only for an appropriate coverage corresponding to the asset value, whether car, factory, property or others
Crop Insurance/ Liability Insurance and others
These are not standardized and mostly over the counter agreements. Do your own cost benefit analysis when you take them
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Disclaimer: This article is for educational purposes only and is not an investment advice/financial advice and should not be construed as such. Decisions taken are solely at your own risk. Read disclosures page for more details.