Arguably the first step in financial planning is to deal with uncertainties of life. Unless one is equipped to face risk, the best laid plans can come a cropper. One can deal with risk by creating, among other things, an ‘emergency fund’, and obtaining adequate and appropriate insurance cover. But for most us, insurance means life cover. This is borne out by the following statistics.
The penetration (annual premium as a percentage of GDP) of non-life insurance in India is below 1 per cent. Even though, it has been growing and has risen from 0.56 per cent in 2001 to 0.93 per cent in 2017, viewed in the context of the global penetration including in emerging economies and size and growth of India’s GDP, it is abysmally low.In fact, roughly 50 per cent of the total non-life insurance premium is represented by motor insurance. The sharp rise in penetration in 2017 has been enabled by the crop insurance push of the Centre.
But there are many risks to guard against and while the right insurance protection depends on one’s personal circumstances, in a majority of the cases the following six risk covers may be useful or even essential.
- Term Insurance:It is important to remember that purpose of insurance is not to make you rich but ensure that your loved ones are not reduced to poverty in your absence. Term insurance is the most economical way of achieving this objective.
It pays a pre-determined amount to your nominee if you die prematurely. You must buy term insurance if your family depends on your income or if you have a large loan to be repaid. Buy term insurance as early as possible because as you grow older, the premium you pay increases. Also, it does become more difficult to get insurance if you develop chronic diseases such as hypertension or diabetes. The sum assured should be at least 10 times your current income. This ensures financial security to the family for 8 to 10 years after you die. Pick the term plan that is most economical, from an insurer whose claim settlements are over 90 per cent. Details of claim settlements in respect of each insurer are available in the insurer’s public disclosures. An additional benefit of term insurance is that the premium paid for it is eligible for tax exemption under Section 80C.
- Health Insurance:Mediclaim, or medical insurance, covers the cost of hospitalisation and most daycare surgeries. The settlement of the hospital bills is often made directly with the hospital, which is called cashless settlement. But in some cases, you may have to pay the hospital and seek a reimbursement from the insurance company later. This is an important insurance cover to have because the cost of medical treatment is increasing rapidly. For several critical diseases, treatment costs can go up to Rs. 20 lacs. Buy health insurance, too, as early as possible for the same reason that you ought to buy term insurance early on. Current regulations mandate that health insurance, once bought, is renewable for life, and the premiums cannot be increased just for you.
An individual should purchase a policy that provides comprehensive coverage that will secure him/her financially, notwithstanding the nature of the illness. Some health insurance providers cover limited daycare procedures, while others cover almost all of them. Daycare procedures include radiotherapy, dialysis, angiography and cataract surgery done as an inpatient for less than a day in a hospital. One must also read through the policy documents carefully for sub-limits. These are individual caps on claims that are set on various hospital expenses such as ICU charges and room rentals. It goes without saying that one who buys a policy needs to do proper due diligence to avoid unpleasant surprises at the time of a claim.
Deciding on the sum assured is important.Take the cost of treating a cardiac procedure, such as a bypass, in the hospital that you would visit and double that cost to estimate your minimum sum assured. This doubling helps factor in the inflation of about 15 to 20 per cent in the cost of medical treatment. Typically, you ought to have health insurance of Rs. 15 lacs or more. But health cover products offer many innovative features. For instance, your financial situation is such that you can take care of medical expenses up to Rs 3 lacs a year, but would like to cover expenses in excess of that, say up to Rs 20 lacs a year. Such a cover would be available at a much lower premium than normal.If you have dependents, it is advisable to buy a family floater plan which will be economical as it covers the health risk of your spouse and kids. Note that there is tax exemption to the tune of Rs. 25,000 under Section 80 D for health insurance.
An important factor to consider while buying health insurance are the insurer’s claims settlement rates, the number of years for which pre-existing diseases are excluded and the premium you pay. The longer you hold a Mediclaim policy, the less likely that your claim will be rejected.
- Home Insurance:Your home is probably the most valuable physical asset you own. Yet, fewer than 1 in 1,000 homeowners typically insure it for damage. A standard home insurance pays for damage to your house due to many perils, including fire, flooding, earthquakes, riots, malicious damage and storms. The amount paid depends upon the type of home insurance you buy. If it is ‘reinstatement insurance’, you will be paid the full cost of repairing. However, if it is based on book value, the insurer will pay a depreciated value. Do also buy a ‘contents insurance’ cover along with the home insurance and make sure it covers theft. While buying home insurance, opt for the reinstatement option and pick a sum assured that is approximately the cost of constructing your home today. Do not opt for a low sum assured (with an eye on lowering your premium) because any claim will be proportionately reduced by the extent of under-insurance.
- Motor Insurance:The law requires you to buy third-party liability motor insurance. If you seriously hurt or kill someone with your car, the Motor Accident Tribunal decides the amount of compensation and damages you pay. There is no maximum limit for this, which is why you must insure. While buying motor insurance, look for a company that gives you the best price, offers cashless settlement of claims and throws in useful add-ons like 24×7 roadside assistance. For expensive vehicles, consider add-ons like engine seizure, zero-depreciation and tyre burst cover.
- Critical Illness Cover:This is an excellent supplement to your Mediclaim insurance. This insurance pays a fixed amount if you suffer from any of the listed critical illnesses. In that sense, the insurance covers costs that are not covered in a Mediclaim — for example, cost of travel of caregivers or loss of income arising from lost days at work. Another significant benefit of the critical illness plan is that it can cover costs for treatment of diseases and conditions such as paralytic stroke, blindness and Alzheimer’s, which may not require extensive hospitalisation but whose treatment is expensive nonetheless. While buying a critical illness plan, keep the sum assured about the same as the sum assured on your Mediclaim cover. Search for plans that cover over 20 diseases, and which include diseases that may not require extensive hospitalisation.
- Annuity:while term insurance coversthe risk of premature/untimely death, annuity covers the risk of a person running out of savings due to long life! It is a product which can be purchased from the insurance company. It provides a pension stream that remains constant as long as the annuitant lives! Generally, the cost of purchase of the annuity is returned to the nominee on the death of the annuitant. The more advanced the age, at the time of buying the annuity, the higher will be the quantum of pension. In India thanks to strong family bonds, planned provision for ones post retirement life is negligible and is one of the lowest in the world. With family structures and situations fast changing, this has become an essential cover where one does not have a pension from the employer or where it is not adequate. Particularly, NRIswho return home at the end of their overseas career, with substantial savings and who are often tempted or lured to make investments that are not suitable to a retired person or start risky business ventures, would do well to put in place a lifelong safety anchor which is not subject to the vagaries changing interest rates.
