Insurance needs to be purchased all through life and must be reviewed as per the changing priorities and situations
Financial planning is a journey to realise dreams. With the help of financial planners, we can create the blueprint of a journey like investing in various assets classes and in different proportions. We review it periodically and accordingly adjust the same. This is our plan A.
It’s understood that most of the time the focus is on plan A. But we also need to have a plan B, which could be insurances.
The day we complete our studies and start earning, we need to have life insurance. When it is life insurance; it’s a term plan. At every stage of life while buying insurance, we need to keep in mind the sum insured and the term. In a term plan, premium increases if the tenure chosen is longer. Also, at this stage we need to think of our dependents like parents and must take the insurance amounting to the bank fixed deposit interest income, enough to the household living. This is the simple method and a good starting point too. The tenure can be the expected life of parents.
Further, insurances need to be purchased at all stages of life like when getting married, starting the family and any other liability like housing loan.
As insurances are like plan B, it should be taken considering the objective for which it is tagged and accordingly the term. For example, for a girl child we need to consider the cost of education and marriage. Thus the insurance amount should be decided accordingly and the tenure must cover the marriageable age.
In consultation to the financial planners, one may use the immortalization tool and reduce the sum insured. But it’s not advisable as during the journey of life you need to increase the sum insured and not reduce it.
Many a times I find people buying insurance for the longest term and even agents of insurance companies suggest the same. To my opinion, insurances are not for profit making but a tool to ensure that during the journey of financial planning if something goes wrong to the bread-winner the plan B comes into picture and makes the financial journey of the family smooth.
Second it’s important to buy medical/health insurance. Many times the employer provides the health insurances. It’s important to check the terms and condition as there are many variants available for group health insurance. In the era of job switches it’s necessary to have your own standalone family floater policy. The advantage of this policy is if you are enjoying the sabbatical between two jobs it will help you. Further, after retirement the employer insurance will cease and due to higher age and existence of ailment, you may be denied any health insurance. So, keep a cushion to fall back upon.
Further, you need to review the amount of insurance regularly. Always keep in mind the cost of medical expenses and the life after retirement. Currently, the cost of medical treatment is rising by around 12 per cent. Again, it’s important to review the insurance at regular intervals as well as various stages of life.
Personal accident insurance is probably given the least weightage even when one is looking to the insurance as plan B. Personal accident insurance cover should be of 10-15 times your income. Though the word accident reflects mostly vehicle accident, but it also includes accidental fall or even an animal bite.
One important coverage available with personal accident policy is the total or partial disability. Due to an accident we may have permanent loss of a limb, which may impact the future earning capacity and in turn affect the financial planning journey. Personal accident policy also covers this loss.
The most important coverage provided in personal accident policy is of total or temporary disablement. If a salaried person is bedridden, he will have a loss of pay in terms of debit of sick leave. For self-employed or businessman, it hampers income to large extent. Under this coverage, the insurer compensates the average weekly income.
Critical illness policies are called ‘fixed benefit’ plans. Assume one is diagnosed with cancer, and then irrespective of the cost of treatment, an insurance company pays a lump sum amount. In many cases of critical illness, you may not need hospitalization, but could be bedridden and under pressure to meet family obligations. Thus a lump sum amount would certainly be a big help. The major critical illnesses are a heart attack, cancer or a stroke. Hence to compensate the work loss due to critical illness and to financial burden of children’s education and financial commitments, you need a product that can compensate your losses.
Critical illness covers diseases where the insured is diagnosed for the illness listed at the time of purchase of the policy and the payment is done immediately to the insured depending on the policy conditions.
Courtesy: Financial Chronicle’s news site Date: 10 Dec 2018 (Sandeep Gandhi)
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