Updated on 27 Oct 2016
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5 essential insurance plans for just Rs 2,620 per month
A lot of people think that insurance is a waste of money. They contend that if the premium was invested in other avenues, it would grow to a sizeable amount. But life can take unexpected turns. The death of the sole breadwinner can transform the lifestyle of the family. A small accident can leave a person with a disability, impairing his livelihood. The treatment of a critical illness can drain the life savings of a family. Even 3-4 days in a hospital can leave a person with a bill equal to 10 years’ medical insurance premium.
What price are you willing to pay for peace of mind? For the feeling that even in the worst case scenario, your family will not have to face financial difficulties. ET Wealth estimates that a 35-year-old needs to pay only Rs 2,620 a month to protect his family’s financial future from the uncertainties that life can throw at him. That is the cost of five essential insurance policies that one needs.
This week’s cover story looks at these five essential covers in detail. We explain why you need these covers and calculate the costs for different age groups and persons in various stages of life. All these policies are very cheap. As our calculations show, the daily cost for a 35-year-old comes to barely Rs 90, less than the price a latte in a coffee shop.
The low costs is also the reason why agents don’t want to sell these policies. Ask any life insurance agent for a term plan and he will offer you an endowment policy instead. Try to purchase an accidental death and disability cover and you will be offered a rider along with a Ulip. Similarly, nobody will be interested in selling a home insurance plan unless you buy costly but needless add-on covers.
Thankfully, you no longer depend on agents to sell you these policies. Most of these plans can be bought online. Buy these covers and you can sleep easy that most of the risks faced by your family in everyday life have been covered.
How much do these covers cost?
Life Cover of Rs 1 crore cover for 35-year-old male for 25 years
Monthly cost Rs 1,000
Health cover for family of four covered for Rs 5 lakh
Monthly cost Rs 1,000
Accident and disability cover of Rs 25 lakh
Monthly cost Rs 200
Home and contents: House covered for Rs 50 lakh; contents for Rs 10 lakh
Monthly cost Rs 250
Vehicle third-party cover for 1000 cc car
Monthly cost Rs 170
Total monthly cost Rs 2,620
WHY LIFE INSURANCE IS CRITICAL
In case of a mishap, the money will support your family and achieve all your goals in your absence
A life insurance policy is absolutely essential because it acts as a lynchpin of your financial planning. You may be doing all the right things- saving for retirement, investing for your child’s education and putting away money for other goals. But have you ever wondered how your family would achieve those goals if something untoward happens to you?
A thumb rule says one needs an insurance cover of at least 6-8 times his monthly income. But this is a rudimentary calculation and does not take into account the liabilities of the person. The cover should be big enough to settle all outstanding loans, provide for big-ticket expenses as also generate an income for the living expenses of the family.
Thankfully, one needs to spend roughly 1% of one’s annual income for a sufficient cover. Pure protection term plans give high cover at low price. A 30-year-old male will pay about Rs 10,000 a year for a cover of Rs 1 crore for 30 years. The daily cost of the cover works out to Rs 28, less than what you pay for parking your car in a metro.
How much life cover do you need?
Use the table below to calculate your insurance needs
Which option suits you?
Term plans are no longer the plain vanilla products they used to be till a few years ago. Insurance companies have crafted innovations that suit various customers and situations. Worried about inflation? You can buy a plan where the insurance cover increases every year. Won’t be able to spare money later?
Buy a single premium policy that does not require you to pay for the entire term. Your nominee is not investment savvy? Insurance companies now have policies that don’t give a lump sum on death but stagger the payment over 10-15 years. Think that buying a pure term plan is a waste of money? There are plans that give back the entire premium you paid at the end of the term.
Not all of these innovations are good for customer. Increasing the cover to adjust for inflation is a good idea but you will pay a higher premium than a regular plan. Similarly, plans that return the premium are costlier and should be avoided. If adjusted for inflation, what you get back at the end of 20-25 years is peanuts. The staggered payment plan is also not a good idea. If the same amount was taken as lump sum and put in a bank fixed deposit, it would
generate a higher income than what these plans offer. But these plans may be useful for families where the dependents are not very financially savvy and could be cheated by greedy relatives and unscrupulous advisers.
Apart from the size of the cover and the payout structure, you should also be careful about the tenure of the policy. In their advertisements, insurance companies highlight premium rates for short-term plans. If someone buys a 20-
year plan when he is 30, the premium will be very low but the plan will end when his insurance needs are very high. At that age, a new policy will cost him a bomb. He might even be denied the cover if his health is not good. Don’t take a 15-20 year plan that will terminate when you are in your 50s. Buy a cover till the age of at least 60-65 years.
Not everybody needs to buy life insurance. If you are single and your parents or other relatives do not depend on your income, you don’t need to buy life insurance. No one will be financially impacted if you are not around. At the same time, if you intend to get married, it is a good idea to buy life insurance and lock in at a low premium when you are young and in good health.
Reviewing your cover
You also need to review your insurance cover at various stages of your life and when you take big-ticket loans (see box). If you have taken a home loan, be sure to take a term cover equal to that amount. In case of an unfortunate turn of events, your family will be rendered homeless if they are not able to service the EMI. However, don’t take a mortgaged linked insurance plan. It is better to take an independent term plan which will continue even after the loan has ended.
The premium rates given in the table assume that the buyer carries the normal risk in terms of health, family medical history and occupation. If he suffers from any ailment that can potentially become life threatening or if there is a family history of a medical condition, the premium would be higher. If he smokes or chews gutkha, the premium will be roughly 25-30% higher than that of a nonsmoker.
Don’t lie when buying
Buyers should not try to hide these facts in the application. If the insurance company finds out that a policyholder concealed information that affected the risk to his life, out goes the claim. Most companies have medico-legal experts who scan the claim documents for any attempt to mislead. Every year, about 2% of the claims received by life insurance firms end up in the trash can. Your insurance policy is the bulwark of your financial plan. Don’t let it be rejected just to save a few hundred rupees in the premium.