Pay for Insurance

How Much to Pay for Insurance

*Please note that the quotes shown will be from our partners

As an adult, what would you say are the major concerns that need protection in your life? I’d rate death, disability, critical illness, general health and well-being, old age and saving for children as the top points of anxiety for all. While we can’t prevent time and fate, what we can do is create a financial cushion to protect us and our loved ones. Insurance does this and allows us to do this at a reasonable cost.

Let’s address each of the above concerns through insurance. While almost all of us are familiar with the concepts of different insurance plans, the difficulty arises when trying to decipher how much we should pay for these plans and what would be the right cover. Remember, insufficient insurance can be worse than not being insured. It can lead you to a false sense of security where you believe that you have adequate insurance and may not have alternative financial savings to help you and your loved ones monetarily in case there is any event (death, illness, accident etc). While I discuss these cases, I’ll consider people between 28-45 years of age for this advice.

Death:

We all know about term insurance so I won’t get into details. What’s important to take into account are factors like how much cover one needs, the time period involved, payments that would support a family in the time of need. The insurance industry today has a host of policies that can custom fit individual needs once you figure out the above discussed aspects. 10 times your annual income is a bare minimum. Depending on your age, it can be as high a multiplier as 20X.

Disability:

The financial burden in case of disability is higher than in the case of death. The individual is still around but his earning capacity has diminished considerably. So, the amount of cover needed is equal if not more than the case of life insurance and for the same duration.

Critical Illness:

Most people argue the need for a critical illness plan if they have a health plan in place. Here’s where our financial reasoning steps in. A critical illness creates a big financial strain that most standard health insurance plans may not be sufficient to cover. Therefore, a critical illness plan should be at least 5 times annual income of an individual or Rs. 50 lakhs whichever is lower. Also, critical illness plans give a lump sum pay out which gives you certain financial freedom to plan how to allocate those resources.

Basic Health:

You basic health insurance plan should be at minimum, equal to your annual income of upto 10 lakhs. Post this your critical illness plan will kick in. You can also look at buying a super-top-up plan to supplement your current health plan.
Now let’s come to paying for retirement and children security.

Pension:

Getting right down to it, your best investment vehicle here is a ULIP. Nothing compares to the low cost of a ULIP. They are better than investing in Fixed Deposits. Why? Because the markets over a 20 year period will beat FD’s by 2-3 times greater returns. ULIP’s are recommended over Mutual Funds as well. This is because equity mutual funds have a cost of 2 percent plus, while low cost ULIPs can operate as low as 1 percent. They even score over the favored pension plans because ULIP returns are tax free while those from pension plans aren’t. For instance, if you invest 1L and get 10L twenty years later. You got a tax break on 1L and you will also get the 10L tax free. In a pension you will pay taxes on the 10L. The best financial advice one can give for pension planning is to start early and invest a mere 10% of your annual income. On top of this, they give you a certain amount of life insurance, which clearly MF’s do not.

Child plan:

One may argue that MF and term plans play the same role as a child plan. Here, understand that the biggest reason to buy a child plan is that the corpus stays protected till your child comes of age. Say the child is 3 years, and an unfortunate event occurs after 6 years. The spouse gets the sum assured but what is the guarantee it will remain unused for the next 17 years. A child plan ensures unmatched protection. There is no scope for misuse of money. Take into consideration the current cost of secondary and higher education in India (or abroad if you have such plans) and include the current rate of inflation. You can also make this calculation really easy by using one of the many online financial calculators available online. Many child plans also offer a waiver of premium and a student income rider that allow the policy to stay in force even after the death of the primary insured.
Be safe, not sorry, insure right.

Collapse