Friday, 16 July 2021

How to Decide the Insurance Cover

Covid 19 pandemic has really taught us the importance and value of our life, no matter in what age group we fall into. Growing insecurity of the future plus the impact the pandemic has on the employment have only added to our worries. This has led to an increase in buying of life and health insurance policies as more and more people are now trying to protect their dependents.

How to Decide the Insurance Cover

Life Insurance

Lets start with life insurance first where I believe Term Plans are the most efficient form of insurance as they are cheap and provide a large cover. If a person dies during the policy max tenor, the nominee gets the sum assured, but no payment is made incase the insured person survives the term.

However, just getting a life insurance is not enough. One also has to decide adequate cover which is good enough to take care of dependents for a considerable period of time incase of untimely demise of the insured. But what cover is a good cover and what should be the policy tenure is the major dilemma people face. The key thing to note here is that cover should not be calculated on the basis of present income and expenses, rather the future value of the goals should be the deciding factor. There are many ways of calculating the cover, but in this blog I will focus on 2 most common methods.

  • The most easiest method, which is also called the insurers thumb rule, is having a sum assured that is 10 times your present annual income. For example, if your annual income is Rs 20 lakh, then your cover should be minimum Rs 2 crore. However, I would recommend to go for atleast 15 times your annual income, some extra protection incase the inflation goes haywire.
  • The second method is a bit tedious but offers more clarity and is called Human Life Value (HLV). Incase you want to maintain your present lifestyle in the future, one has to calculate the present value of future income, expenses/goals, liabilities and investments.
For both these methods, if you start working at the age of 25-30 years, you can opt for a maximum tenure of 60 years. Don't unnecessarily increase the tenure as the premium increases the more longer the term is. Also, 30 years is good enough for you to save a corpus which is good enough to maintain your normal lifestyle.

Health Insurance

Now lets focus on what is a good Health Cover. 10 years back, a health cover of Rs 5 lakh used to be considered adequate. However, rising medical costs has now changed the scenario. In addition , with advancement in medical science, people are most likely to survive new lifestyle diseases, which means more hospitalization and treatment expense.

Considering health inflation coupled with lifestyle diseases, especially for those living in metros, a young 25 or a 30 year old should opt for a Rs 10 lakh policy with maximum top-up available. This means as your age and income grows, you can revise your policy cover as per your needs. So a treatment that costs Rs 5 lakh today will costs around Rs 10 lakh after 8 years taking 10% inflation, so one should be future ready. Senior citizens can opt for Rs 5 lakh cover with a top-up of another 5 lakh, which I feel should be adequate.

So your age, medical history, present health status and city of residence are crucial parameters before finalizing your health cover. Another factor one should be mindful is Critical Illness parameter in which you get a lump sum from the insurance company irrespective of the medical expense incurred in treating the illness.