1. Cover The Gaps

It’s good to have well-laid plans to reach your financial goals and to build assets over a period of time. But such plans can get derailed in case of the sudden death or disability of a key earning member. In the worst of cases, it can also leave the family in penury or over-burdened with debt.

The death of the breadwinner is a real risk that families face—Covid-19 showed how transitory lives can be. That is why taking a proper life insurance policy is the first step for anyone planning for a financially secure future.

Which Cover Should You Choose?

The first thing to remember while choosing a life insurance policy is not to fall for the neighbourhood insurance agent’s sales pitch and end up buying a traditional policy that does not provide adequate cover. These policies also have an investment component and do not provide pure life cover.

A term insurance policy can provide you an exhaustive cover at a much cheaper price. “Term insurance is a type of life insurance that financially protects the family in case of death of the life assured. With term insurance, you can get a large amount of life cover (or sum assured) at a relatively low premium rate,” says Satishwar Balakrishnan, managing director and chief executive officer, Aegon Life Insurance.

A term plan provides your family financial protection in the form of income replacement after you are gone. “Its true benefits can only be harnessed if you make an informed choice and choose a policy that has a term that covers at least your earning years. In addition, you have the option to get protection from critical illnesses,” Balakrishnan adds.

How Much Cover Should You Have?

The sum assured or the life cover should be an amount that can replace the future income of the earning member on his or her demise. One rule of thumb is to get coverage of 8-10 times your annual income.

However, it is important to carefully consider the variables, including income sources, dependent family members, debt, and liabilities. For instance, one must ensure that the sum assured provides for the cost of the home loan, if any, apart from replacing just your income.
“The key to choosing a life insurance policy is to ensure the continuation of income while meeting financial responsibilities and goals. It is, therefore, important to carefully consider variables, including income sources, dependent family members, debt and liabilities,” says Sandeep Mishra, chief distribution officer, partnerships and group business, Bharti AXA Life Insurance.

Things To Keep In Mind

Age And Fitness: Your age is one of the primary factors that determines the amount of premium you pay on your term plan. The younger you are, the lower will be the premium.

Also, a person who is fit, and follows a healthy lifestyle would most likely pay a lower premium than someone who does not have a healthy lifestyle, smokes, or has any ailment.

Credibility Of Insurer: Choosing the right insurance company is also critical. “Choose a company that has a good track record for settling insurance claims,” says Balakrishnan. You can check the company’s claim settlement ratio, as it is published by the Insurance Regulatory and Development Authority of India (Irdai) every year.

The claims ratio of an insurance company indicates the number of claims a company has settled compared to the number of claims it has received. The higher the ratio, the better it is. “A healthy claims ratio (ideally over 98 per cent) indicates that the insurer is credible and trustworthy,” says Mishra.

Do Due Diligence: Be thorough with the charges and services attached to the policy. Look for the digital services offered and other information which will help you at later stages. The policy documents need to be vetted carefully.

Adds Balakrishnan: “A good way to do this is by opting for a 15-day lock-in period that allows the buyer to review the fine print of the policy. If something seems off, or complicated, get your doubts cleared. Insurance shouldn’t be complicated. The easier it is for you to understand the policy, the better it is.”

2. Mind Medical inflation

Inflation is one of the biggest threats to our finances. Inflation reduces the value of the rupee, which makes goods and/or services more expensive. Typically, inflation is assumed to be in the range of 5-7 per cent per annum.

However, medical inflation is much higher, with some estimates placing it around 20 per cent. Not surprisingly, you would hear people talking about how even a few days at the hospital set them back by a few lakh rupees. Medical expenditure can cause significant financial stress if a family member develops a serious ailment, or multiple members need hospitalisation.

“Medical inflation is simply the increase in the average cost of healthcare services over a period of time. Though the figures could be different in individual years, it is generally understood that medical inflation is around 15-20 per cent. Some of the reasons behind higher medical inflation are increase in the cost of medical supplies, shortage of quality medical staff, and new research leading to new, but costly innovations in life-saving medicines,” says Amit Suri, CEO, AUM Wealth, a financial services company.

He adds that medical inflation has always been higher than normal inflation because of cumulative effects. Normal inflation factors in the cost of many ingredients, some of which may not increase.

Insurance To The Rescue

To a large extent, health insurance can take care of your medical needs, but it is important to have adequate coverage, too. “Purchasing a health insurance coverage is essential, depending on your age, family situation, and general health. Choose a policy that meets your needs, because insurers today offer a variety of health insurance plans along with the option to modify them to meet your needs,” says Bhaskar Nerurkar, head, health administration team, Bajaj Allianz General Insurance.

For instance, you must decide if you want to purchase a family floater or an individual policy for each member of your family.

If you want to increase the amount of coverage, a super top-up policy can be an affordable choice. Purchasing a conventional policy without first making sure that it meets your needs will only pose problems later. Making an informed choice before purchasing the policy and researching its coverage will pay off at the time of making the claims.

“It is important to understand your requirement while choosing a health insurance policy, as it will help you opt for the right cover. Also, apart from looking at just the premium and the cost, factors such as deductibles, co-pay, sub-limits, disease waiting periods, and density of network also need to be assessed so that you are not distressed at the time of making a claim,” says Nerurkar.

Create A Buffer

While having adequate medical cover is essential, it may not be enough for everyone, especially senior citizens.

The elderly should surely have a medical corpus in addition to health insurance, since the sum insured available to them may be limited, and certain diseases may be excluded from coverage.

In addition, senior citizens should take a few add-ons like yearly health check-up and outpatient department (OPD) expenses coverage along with their existing health insurance plans, says Suri. Usually, seniors have daily medical expenses that do not need hospitalisation.

“A medical corpus can be kept in a bank fixed deposit earmarked as health corpus that could be utilised when the need arises,” he adds.

Do note that medical inflation can hit you financially at a time when you may already be struggling with your health. It is crucial to provide for it in advance.