Yes. There is a portfolio that you should create if you don’t want life to f*** you. And no, it does not include any shares.
I am talking about having an insurance portfolio.
Many of you may feel that this is not worth your time, but please hear me out.
A properly thought-through and well-constructed insurance portfolio ensures that you, your family and your wealth are covered against all eventualities. It takes care of every major ‘what-if’ situation, which may be low-probability but have a high impact if it occurs.
The simple idea here is to cover most types of risks. And life and health insurance alone are not enough. You need…
There are 5 major insurances that should find a place in your insurance portfolio:
- Life insurance
- Base Health insurance
- Top-Up Health insurance
- Disability insurance
- Critical Illness insurance
Let’s see them one by one
- You buy life insurance in your name but it is not for you. It’s for your family and dependents.
- Ask yourself that if you were to die tomorrow, will your family be able to see through all their expenses for the rest of their lives? Will they need to sell some assets to clear loans, pay bills, etc.? If the answer is yes, then you need life insurance.
- An early or unexpected death can put serious strains on your family’s finances – at times, it can even turn tragic.
- Many people have a life cover of Rs 5-10 lacs via traditional LIC policies. These are useless covers if they have a young family, negligible savings and are the sole earning member of the family.
- A life cover should be large enough to take care of family’s regular expenses for several years, all major financial goals and also clear outstanding loans. Read How much life cover do you need?
- Please do not mix investment with insurance.
- All traditional insurance plans are actually worthless, as most people can’t afford the premium that is required to be paid for big-enough covers.
- And you don’t want your life cover to depend on your premium paying ability. So simply opt for plain term insurance plans that are dirt-cheap and the best forms of life insurance. You can easily get Rs 1 Crore Term Life Insurance for just a few thousands. But as big as this Rs 1 crore sounds, it might not be enough for many people (even for regular people who are the sole earning members of the family). So find out your right insurance amount and then purchase it.
- Take a term cover that takes care of the death-risk till few years after retirement. It’s assumed that by that time, you would have already accumulated enough financial assets that can be used if needed.
Base Health Insurance
- If you think about it, a medical cover is more important than life cover. After death, the person stops consuming assets. But in medical situations, consumption of assets (i.e. savings) might increase.
- If you are hospitalized and unable to work for months, just think about the consequences. You have huge medical bills to pay and no income to fund it. You will have to dip into your savings or take help of your family member and friends.
- Health insurance covers the costs of medical treatment in case of you or any family members get hospitalized.
- It ensures that you don’t have to pay these bills even if you are fully capable of paying. It’s like a wealth insurance as you don’t need to spend your savings on paying medical bills.
- Many people are already covered by their employer’s health covers. That is fine but at times, employers have upper limits on the bill amounts that they will pay for. Also, in case of a job loss or in between jobs, people remain unprotected.
- Please do not depend on your employer’s insurance plans to cover you for everything. If it does… then well and good. But your job is (in most cases) not guaranteed. You will also be uncovered between two jobs. Or your new employer might not even offer you any cover at all. So ideally, do not depend only on your employer for risk coverage(s). Purchase personal health cover in addition to the one that employer provides. They don’t cost much.
- By the way, if above points don’t convince you, let me tell you that health insurance has tax benefits too under Section 80D of the Income Tax Act. So that should push you more. 🙂
Top up Health Insurance
- Top up health insurance policies offer additional health cover beyond the base policy (discussed above) or above a chosen threshold limit.
- A serious medical condition can quickly exhaust your base health cover. That is where these top-ups come in handy.
- Let’s say you have a base cover of Rs 3 lakh (provided by your employer or purchased by yourself). If you purchase a top up plan of Rs 10 lac with a threshold of Rs 3 lakh, then all bills above Rs 3 lakhs and up to Rs 10 lakhs will be covered under the top-up policy.
- Top-up health insurance plans are much cheaper than base plans. So you can use them to increase your existing health covers to safeguard yourself against rising medical costs.
- There is no perfect formula to arrive at the right health coverage, but having a base policy of Rs 5-10 lac and another top-up policy of Rs 10 lac should be decent enough cover.
Accident and Disability Insurance
- Life insurance pays when you die. Health insurance takes care of hospitalization expenses. But what if you a rendered disabled, temporarily or permanently?
- This in most cases reduces person’s earning ability and also increases expenses due to disability – a double whammy.
- This gap in your risk coverage is filled by Accident and disability insurance covers.
- These policies cover scenarios like (i) death due to accident, (ii) permanent total disability, (iii) permanent partial disability (iv) temporary disabilities. But disabilities (permanent or otherwise) due to natural reasons are not covered. But you really can’t cover everything. Can you?
- Sadly, most of these policies do not have a very large cover. So you should buy the maximum you can get.
- Alternatively, you can purchase it as a disability rider along with your term insurance plan. But it’s best to have a standalone policy.
Critical Illness Insurance
- These policies pay out lump sum amounts if the insured person is diagnosed with any critical illness that is on the list of the insurance policy. Like – cancer, etc.
- The money can be used for out-of-pocket and non-hospitalization related expenses. It also compensates (in a way) for lost income.
- Insurance companies are very smart and hence, you need to read the fine print about which diseases are covered and which aren’t, what’s the waiting period, etc.
- Though this policy is also available as a rider with life and health insurance plans, I personally feel that having a standalone policy offers flexibility and far better coverage than what would be offered in riders.
- If you have a family history of critical illnesses, then this is a must for you.
The timeline below tells which expenses (or events) will be paid for by which insurance policy. It’s no doubt a sad timeline. But this highlights the possibilities of major unexpected fund requirements.
If you are young and still have some health coverage from your employer, you may feel like delaying the purchase of these policies. But the fact is that if you delay the purchase too much, you run the risk of health covers being denied because of health conditions. It’s best to purchase these policies when you are young + fit and when chances of rejection are very low.
This feels too much?
I know. It seems to be too much to be thinking about all the risks. But let’s not be delusional here.
All or any of these risks can become a reality for anyone. And unless you have tons of money stashed up, you will have a tough time dealing with these.
There is ofcourse a cost for covering these risks, i.e. premium to be paid. But it’s worth it.
Just imagine yourself and your family in any of the above-discussed situations. How will you cope up with all the expenses, etc.? If you think you will manage it somehow then my best wishes to you. I hope you are right.
But if you feel you aren’t well prepared, then please take action to protect yourself from these risks. Ideally, you should do it even before saving or investing for your financial goals. You cannot have a solid investment plan unless you have built a strong foundation of risk-covering structures. First, ensure you have covered the downsides and then focus on increasing your upsides.
Hi Dev ..it was nice article, I request you please could you write on behavioural finance….human psychology on investing….I hope this will more motivate to investors to invest…He will be firm on decisions in any type of situation….Thanks.
Will try to write about those aspects soon. 🙂
Nice post! I appreciate the breakdown and insights!
Thanks Lance 🙂
Well thought off
Thanks Sanjeev 🙂
You might want to consider one other, an umbrella liability policy. I’ve got one because if someone tripped on my front doorstep and figured out I had a large nest egg in my early retirement they could possibly get at it. Umbrella policies are pretty inexpensive and add to your other insurance liability coverages. You only need as much as your net worth but if you are wanting to be FI someday then you are planning on having a pretty substantial net worth. Standard liability limits on car and homeowners policies aren’t nearly sufficient to protect a FI person’s investments without additional umbrella coverage.
Sure Steve. Will check it out and see how applicable (and available) those are to Indian situations?
Dev, my son suffers from a genetic disease called Wilson’s disease. No company wants to provide health insurance for him. Can you guide on this?
I have sent you a mail. Please check.
Really thought provoking article…keep the good work on this side of personal finance…when everyone is buzzed around with equity noise.
Thanks Vivek 🙂
Yes. At times people start focusing too much on beautifying the top floors of their houses when the foundation of the building needs urgent repairs. 😉
Dev i like your article but if we add the premium of all the policies it will be big burden so what you suggest on the hierarchy of the policy.
Having a term insurance and a simple health cover should be priority.
Nice and well articulated. Financial preparedness is must before thinking of financial freedom.
I really love your writing
Very useful Article
Thanks Sabarish 🙂
गजब का लिखते हैं आप अनेकों सलाम है आपको
Shukriya Nirmal 🙂 🙂
One of the best post from you. Rocking !
Thanks Ashutosh! 🙂
Hi Interesting Article. Perhaps why don’t you put case studies of personal finances.
Thanks. Will try doing some.
Dev, Interesting article. I think, Life insurance should be linked to which phase of the life are you in. If you are in 20s without any dependents, you may not need any insurance. Why do you need an insurance if you are married and both working and no liabilities? When you have huge liability, say a home loan of 50 L, and spouse is not working, that is the time you really need high term insurance. Once you are in your 50s and you got a net worth of couple of crores, do you still need an insurance? What is the harm in selling assets to pay your bills? Other than your primary home, all assets can be disposed off and you can create a fixed income so that the dependents can live without any problem. Is there any issue with this approach?
It eventually boils down to the choice one makes. Some people might not be comfortable with the idea of assets being sold to fund family’s future expenses. Others might be fine with it. In any case, given the cheap cost of life insurance (term plans), I feel cost is not much of an issue here.
The article is well written. I have gone through it multiple times as I am trying to cover my family from all foreseeable risks.
I would like to share you some of my observations and questions. I would love to hear from you on them.
i) I am already covered under a Term Insurance and I think I do not need to cover me again under a personal accidental (PA) insurance policy. Most of the PA policies available now do have ‘death’ covered which increases the premium. I found Bajaj Allianz Personal Guard offering optional ‘death’ coverage and has finalized on that.
2) If I am covered by a standard health insurance of 5 Lacs and then a super topup policy of 20 Lacs, my total cover becomes 25 Lacs. Do you think a critical illness policy is needed? If yes, how much would be an ideal cover?
I think I wasnt clean enough about point 1. The Bajaj Allianz Personal Guard policy is for Disability cover.