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Are you insured enough to tackle a crisis?

By Sunil Dhawan and Deepti Bhaskaran, Outlook Money
July 09, 2009 11:35 IST
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Leading life is somewhat similar to driving a car. Driving a car entails preliminary checks to see if every part is working fine: the right pressure in the tyres, adequate coolant, smoothly working clutch and engine parts.

All these, backed by a full fuel tank, imply that one is in control and set for a long drive. Life similarly asks for control over various things so that we can have a good time living it.

What one earns, spends and saves in the present are not the only indicators of how well one is in control of one's financial life. To keep things under control, one should also do a good job of making provisions to meet future financial needs. Insurance is a key part of this planning. We look at provisions like health and life insurance covers in addition to those for house, home loan and car(s).

Health insurance

The right cover. Unlike life insurance, where you can figure out the right sum assured amount by using some thumb rules, arriving at an optimum health cover is usually difficult. Says Deepak Mendiratta, managing director, Health and Insurance Integrated, a health insurance consulting firm: "There are no calculations or thumb rules to arrive at a cover. However, you could look at it in two ways.

"First, check for any hereditary ailment within your family or the kind of ailments your peers or friends usually encounter and cover yourself appropriately.

"Second, see how much money can you put away every year so that a sum insured could be looked at accordingly."

9 questions to check if you are in control

  • Is anyone financially dependent on me?
  • If yes, then how much life cover should I buy?
  • Should I go for a pure term insurance plan?
  • Can I manage my investments separately?
  • Should I buy a bundled plan like an endowment policy or a Ulip?
  • Till what age should I keep myself covered?
  • Have I planned for long-term financial goals of my children and myself?
  • Is my nominee aware of the covers taken?
  • Am I reviewing my coverage needs regularly?

Plugging gaps. You could simply buy another health insurance policy to the first one to increase your total sum insured amount. You can club the two policies to meet the hospitalisation expenses, if the need arises.

However, you can never claim an amount higher than the medical expenses you incur. A family floater is also a good way to bump up your cover. It is bought for the entire family and the sum insured opted for is available to all.

You could also top up your cover by looking at policies with benefits like critical illness plans and hospital cash plans. Since these policies pay in lump sums, they are usually designed to take care of your income stream for the period you are hospitalised.

Life insurance

Get term, get control. Life insurance is meant for those whose financial needs you would like to be met after you are no more. Review your situation periodically to maintain adequate cover.

Plugging gaps. Check on two things to identify any gap in your term insurance. The first is the coverage amount. The most important thing is to estimate your dependents' financial needs in the unfortunate event of your death. Take into account the lifestyle they are accustomed to and the one you would want for them in your absence.

A thumb rule for those early in their career is to have a minimum cover of about eight times their gross annual income. As one ages, it may be trimmed to about five times the gross annual income.

Now, check the duration of the cover. See if there is a period which is not covered. It is not right for a 30-year-old man to buy a term plan for 15 or 20 years. Buying a term plan at around age 50 is costly and there are health issues.

6 steps to buy a term plan to be in control

  • Identify insurers that offer policies for the longest term
  • Also look for policies that have maximum maturity age
  • Choose three insurers with the lowest premiums for your age and other parameters
  • Refer to websites not only to find out the offered premiums, but also compare them
  • Go for the annual payment option over the single premium option because, otherwise, if the rates fall in the future, you stand to lose
  • Review after every addition (for example, parents becoming financially dependent on you) or deletion (children getting settled) of financial liability

Unlike endowment plans, premium of term plans rises as its duration increases. However, life is uncertain and you should ideally choose a plan that covers you for long.

Protect your house
  • Opt for a Householder's Package Policy
  • Take cover even against technical or mechanical breakdowns
  • Buy through brokers or agents

Term cover can be dropped easily once financial responsibilities are over. Currently, some insurers are offering term plans with coverage till age 75 or a term of 30 years.

If you have a home loan, you should take a term plan or a loan cover term plan propotionate to the home loan amount. Ideally, the plan should start with the first home loan EMI.

How to stay in control

Review insurance plans regularly to accommodate changes in your life

Life cover

  • Revaluate cover after changes in take-home income, family status, financial liability and after spouse discontinues or resumes work

Health cover

  • Buy a basic policy in addition to employer's cover
  • You can top it up with floater plans, benefit policies like critical illness plans and hospital cash plans
  • Look at exclusion clauses

Auto cover

  • If you are buying directly from insurer, bargain for best possible price. Bargain with brokers too
  • Don't compromise on cover for a discount. Always check out what covers you are getting
  • Insure car on full IDV. Higher discounts might mean a lower IDV. Ask for the exact IDV
  • Ask insurer if it has tie-ups with dealers of your car model so that you can get cashless claim settlement
  • Co-payment clause, known as 'excess' or deductible in the policy, makes you bear a portion of the claim. A higher deductible would mean lower premium since the risk shifts from the insurer to you. You could opt for a higher deductible to get more discounts. But, this means that if there is a claim, your liability to share the bill would increase

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Sunil Dhawan and Deepti Bhaskaran, Outlook Money
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