Is your Current Insurance Plan Good Enough to Save you From Anything Critical? : Part 2
Every Insurance policy should be custom tailored for each individual as per the needs and risks involved. In the market, there are several products in the market and agents that provide them maximum incentives. You will notice that most of the old generation has an endowment life policy and and in recent years people have opted ULIP considering it the best investment.
Each product has its utility, but it should match our needs and requirements. Therefore, basic knowledge is required to choose the products wisely.
One should cover holistically so that you and your family can escape the additional strain of lack of money in critical times.
So Let us discuss the significant types of Insurance listed below:
- Life Insurance
- Health Insurance
- Critical Illness Insurance
- Property Insurance
Life Insurance
The objective of Life Insurance is to protect your earnings even if you are not in this world. Usually, Life Insurance Policyholders are the ones who are earning; however, as the premium goes higher with age, the best time to start is when you start your career.
And if your family size and earnings increase, you may increase the cover by taking another policy. The popular thumb rule is to take the cover of 10 times your annual income. But this is not a very good rule to follow as it doesn’t consider your liabilities, dependents’ needs, etc. Better to account for all liabilities and future expenses, such as the following.
- All loans and mortgage.
- Education cost of your kids.
- Annual income multiplied by the years your dependent may need support, ideally at least till your youngest kid graduates. (Adjust for inflation of 5% to 6%)
- Expenses if your ailing parents will need special care or anyone in the family.
One should add all of the above and determine the final insured amount. However, one should be careful not to be over-insured.
You can lower the premium if spouse earns higher salary and has a promising career, or in case the family have various other sources of income such as a house or office rental.
Furthermore, you may need lower coverage if you are financially independent or have sufficient assets to care for your family’s needs.
Things to Consider:
1. Take Life Insurance from a Reputed Company
Taking life insurance from a reputed company with a credible settlement record is better. The settlement ratio is published by IRDA every year and published in major newspapers; however, analyze the records of the last few years and not just one year. Link
Avoid complicated riders and opt for a pure term plan, this would even lower the premium
2. Chose Your Policy Period Wisely
Duration should be as per need and not what agents push for while choosing Life Insurance Policy. Choose Insurance Policy till your family needs support, such as till your youngest child completes their education.
3. No Rejections after Three Year of Policy Duration
One must note another aspect of Section 45 of the Insurance Act. Section 45 of the Insurance Act says that if your policy is three years old and you have paid premiums on time, the insurance company can’t reject your claim on any ground, including incorrect information provided in the form while taking the policy.
Section 45 of the Insurance Act safeguards you from rejections. However, always disclose all facts correctly while taking Insurance, and don’t be dependent on an agent to fill your form.
4. You can Request Changes/ Return Your Policy.
Once your policy is issued, please go through the document. If there is any incorrect information request for change, you may even return the policy during the free look-up period, which is usually 15 days.
5. Avoid Endowment Plans
Avoid endowment plans as they give low cover compared to the premium you pay, so it is better to opt for a term plan and the money you save on premium, invest in pure investment products like PPF or mutual fund based on your risk appetite.
6. Avoid ULIP Policies
Lastly, avoid ULIP policies until you understand the product and it suits your requirement. Although ULIP has changed slightly from its previous avatar, most of your first few years’ premium goes towards commissions and insurance costs, not the promised investments.
The worst case in ULIP is if you opt for it and exit it after minimum lock-in, you may not even get all the premium you have paid; forget about returns.
Related:Learn 8 ways to Grow your Finances if You aren’t Saving Enough.
8. Think Good About Things you Fear.
Some always have some or other Fear in them. So how to deal with it? Bless it, picture “How amazing you were” in your mind, and face your Fear well. Remember! Confidence is superior to fear, so always believe in spirituality and chase goodness.
Health Insurance
Most salaried class people receive health policy from employers, but it may not be sufficient, as we have seen in the earlier article.
Therefore, you should take an additional personal health policy as per your need and number of dependents. For self-employed and Entrepreneurs, this should be a must until their net worth is sufficient to cover future medical expenses easily.
As it is not income dependent, we should take Health Insurance as per the cost of medical expenses these days. I am not an expert on it; however, most surgeries are below ten lacs. However, transplants can cost upward of INR25 lacs, and cancer treatments are even more expensive. We shouldn’t aim to cover every treatment as some are expensive and rarely occur, but the cover should be good enough to cover common medical treatments.
A cover of 25lacs+ is expensive for a family. Therefore, you can break it into base cover and super top up. Base cover is expensive as it gets executed as soon as you get admitted, and when it gets exhausted, your top-up plans come to your rescue.
Top-up plans are cheaper, too; therefore, never miss out on them. For example, one can have a base cover of 5-10 lacs and super top-up plans of, say, 25 to 50lacs; this would cover if not all, most of the disease and treatment in the country.
Things to Consider:
- Select an adequate base cover along with a super top-up plan.
- Only choose super top-up plans which allow multiple claims in a year. If budget permits, choose the higher base cover because getting a cashless claim from the top-up plans is complicated as they need evidence of payment from the base policy. Therefore several super top-up plans end up in reimbursement-discuss with the company and insurance advisor.
- Choose policies with a higher limit or no cap/sub-limit to bed charges and procedures.
- Enquire if modern surgeries like robotics are covered, furthermore if treatment and surgeries are covered which require less than 24 hours of hospitalization.
- Some policies also provide OPD charges and health checkups; however, check the premium as it drives the premium higher.
- Check for exclusions on what is not covered; this is very important. Exclusion in the policy is the first thing one should discuss with an advisor or the company. The waiting period for the pre-existing disease should be a minimum.
- Your Health Insurance should cover pre and post-hospitalization charges for a maximum number of days.
- Other charges such as ambulance, daily allowance, even air ambulance in higher cover, choose as per requirement.
Critical Illness Insurance
In chronic severe illness where you may be bedridden and may not need continuous hospitalization, in such a situation, term insurance will not be of use as you are alive, and health insurance will only provide hospital expenses. Still, you may have to take care of day-to-day expenses and family commitments.
In this scenario, critical illness comes to your rescue; once you know about the disease, the company will pay a lump sum as per your policy, and the policy will cease to exist. It is a one-time benefit provided for critical illness.
Some examples may be stroke or cancer, where you may be out of hospital after a few days but may be bedridden at home for a long time. This product can compensate for work loss, kids’ education, and other commitments.
Things to Consider:
- Check the list of the illness covered; it should be an exhaustive list covering most diseases.
- There may be sub-limits for some diseases; if that disease occurs, the policy will continue with a reduced amount equivalent to the paid amount for that disease.
- Check the list of excluded diseases.
- Generally, the claim is settled only if a person survives for certain period after diagnosis, the periods differ for different disease. Prefer policies where survival period is minimum.
- Ensure the policy can be renewed for a longer time, preferably lifelong.
- The critical Illness policy is not helpful for recurring illnesses as the payout is only once.
Lastly, this is a complicated product. Therefore, you may take the help of a medical professional to understand the coverage and limitations.
Moreover, this is an add-on product; therefore, choose this in addition to adequate health insurance coverage. You may even avoid this if there is a budget constraint or you don’t understand the product completely; instead, increase your health insurance cover.
Related: Are You Trying To Find Ways to Get Higher Returns On Your Investments. We Got You Covered.
Accident Insurance
Accident Insurance is the least popular personal insurance product; many are unaware of its need. Imagine a situation where a person meets with an accident, gets treated in hospital for a few days, and comes back home but may be disabled totally or partially.
In this case, term insurance is of no use, and neither is health insurance, as he is out of the hospital. Furthermore, this may even impact his earnings permanently or for several years. Here accident insurance provides an amount higher than the sum assured or a percentage of the sum secured as per the category of the disability.
In another case, Doctors may advise a person on bed rest for a few weeks or even months. Here he may receive some pre-decided allowance per day to cover pay loss.
In case of accidental death, full sum assured is paid to the nominee.
Things to Consider:
- Premium depends on the level of risk in your profession, not age.
- Some additional benefits include children’s education bonuses, daycare charges, etc.
House and Property Insurance
We always have the vision to buy our dream house and eventually try to buy it and load it with expensive interiors and other expensive stuff. Today homes are going digital with more expensive interiors.
Sometimes the price of homes is higher than an individual’s net worth as it is on loan. Even after paying the loan, it is more than 50% of net worth in several cases. So if a person has a house and its contents are worth 1.5 crores, his total net worth may be just two crores (including the house).
This person may have Insurance for his ten lacs car as it is mandatory but will have no insurance for his house, and this thought may never have crossed their mind to take Insurance. Are you one of them, don’t worry, most of us are with you.
House insurance protects you against theft, fire, or natural calamities such as floods, riots, and terrorism.
- The Insurance covers structures as well as belongings in the house.
- Add on covers for your expensive jewelry, art, paintings, etc.
- Cover alternate arrangements and living expenses in case of flood or fire in your home.
- Protection of rentals in case Owners gives the house on rent.
Final Thoughts
The objective of this article is awareness and knowledge of Insurance, and we are not trying to give advice here. However, a basic understanding of insurance products will enable you to make the right decisions and escape bad Policies by agents. You are requested to further explore and consult your insurance advisors before deciding on your policies.
Rajiv Sharma
Rajiv has worked for more than 15 years with Big 4 and other Multinational companies such as KPMG, EY and C&W in research and consulting role. His educational qualifications include BTech from NIT Nagpur and Masters in Construction Management. Apart from his primary expertise in real estate business, he is passionate about personal finance and stock markets. He is avid reader and researcher who enjoys sharing his learnings in the field of personal finance and capital markets.
