A Portfolio to ensure that Life doesn’t F*** You!

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.

Life Health Insurance Portfolio

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…

5 Insurances

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

Life insurance

  • 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.

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 lumpsum 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.

Insurance Portfolio for Individuals

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.

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Why you should convince your Close Relatives to get Insured too?

Shouldn’t you just be bothered about getting you and your immediate family’s life and health insured?

Ofcourse you should be.

Immediate family comes first. And you don’t want to leave their health and post-your-death-family-expenses to chance. Isn’t it?

So definitely, you should first buy proper health and life cover for yourself and your family.

Suggested Reading – How to find what is adequate insurance cover?

Family Life Health Insurance

But as the title of this post suggests, it makes (a lot of) sense to have your close relatives – other than spouse, parents and children – to be insured too.

I will tell you why.

The debate about lending money to your relatives or not is a long one in itself. Everyone has their own views when and whom to lend and when and whom not to.

But when money is needed for medical reasons or sadly, after death of a relative, your hard-thought-notions about ‘your-money’ can change overnight.

What will you do if one of your close relatives (say first or second cousin) is in financial trouble?

Most often than not, you will help them (assuming both sides are not on fighting terms).

And if money is needed for some medical expenses, then you really can’t say no.

And god forbid, if this relative dies without making proper financial arrangements for his/her immediate family, chances are high that you (among many others) will slowly have to take up his/her family’s responsibility too.

You just cannot turn down requests for money in such cases, no matter how smart you are. Also because you don’t want to come across as a person who doesn’t help family members. That’s evil.

But had this relative of yours, been wise enough to purchase a proper health and life insurance cover, the situation would have been much better. He or his family would not have to depend on others for financial help.

People have their own financial goals and problems to deal with. And even if they really want to help, it can get tough at times to do so.

Take your own case. If you are already running a tight ship financially and a close relative needs money for a medical emergency, will you be able to help him? Will you be able to take this new and unexpected financial responsibility?

The ideal answer is yes (ofcourse). But in reality, it can strain your finances a lot.

And the financial responsibility that we are talking about can either be temporary or permanent.

Temporary in case of some one-time health-related fund requirements (like hospitalization or surgery). Permanent in case of death and on-going need to financially support the dependents of the relative.

Its not easy to say no in such circumstances.

We are humans and we should act like one. Hoarding money is not the ultimate aim of life. We should help others as much as we can.

But if a small step by your relative can cover some of these risks, it doesn’t hurt for you to spend time to convince them to purchase a health and life insurance policy (even if its inadequate*). You might even have to ask them some uncomfortable questions. But its necessary.

And if you succeed in convincing your relative, keep pushing till they act on their newfound conviction.

*This will reduce the risk of future financial liability for others (like you) to some extent.

Its very easy to say that it is your relative’s problem and not yours.

But when bad times come, we all get sucked into these situations. And you don’t want to screw up your finances just because someone else was not responsible enough with theirs.

I agree with you if you think that this is a very far-fetched thought.

But the risk is real.

You should carefully assess how people close to you are covering the health+life risk for themselves. You will know exactly where the risk is, whom you will not be able to say No, and whom you should be convincing.

So think about it.

Getting you and your immediate family’s life and health insured is most important. But also important is to convince (or force) those people to get insured – to whom you will not be able to say NO in times of need.

PS – Replace ‘close-relatives’ with ‘close friends’ and the discussion is still valid. You cannot say no to many of your friends too.

Yes. Buying Health Insurance protects Your Wealth, not Health.

For past few weeks, I have been doing quite a lot of research on finding the Perfect Health Insurance Policy. And my research has led me to one simple conclusion.

That there is no such thing as the Perfect health insurance policy. Ofcourse there are good policies. And then, there are few great policies too. But there is no Perfect policy out there.

So should I (or for that matter anyone) avoid buying one, just because I am not able to find the perfect policy?

The answer is a big No!

It is the same as the idea that one should invest, even if you cannot beat the stock markets.

 
Health Insurance Protects Wealth
 
Now what exactly is the ‘Perfect’ in this Perfect Health Insurance Policy?

Atleast for me, a perfect policy would cover all the diseases (including critical ones), should offer unlimited renewals, have hassle free claims procedure, no co-pay clauses, no hidden clauses which I might easily overlook, no caps on room rent, fees or anything, no disease-level or category-level caps, provide lump-sum amounts in case of critical diseases, etc. And ofcourse, it should not be very costly.

Though I can easily get into my preaching-mode and say that health insurance is not an investment, the fact is that I will still love to buy a policy that is cheap and offers me the world. The money I can save because of the low cost of the so-called perfectpolicy, can be redirected towards investing for the long term.

By the way just to put it on record, I do believe that health insurance should not be treated as an investment or a tax saving instrument. Period. You might still get tax benefits for buying health insurance, but that should not be the primary reason to purchase it.

Now you might have already found a policy that meets all the above-mentioned criterias of a perfect policy. But I am yet to find my perfect policy. Or maybe it exists and my definition of ‘not-very-costly’ is different from other people. In any case, I have moved on and purchased a policy which might not be perfect, but is still good enough.

The point that I am trying to make is that even if a policy passes on 7 of the 10 parameters you set, then you should buy it. Don’t wait for too long and try your luck.

This brings me to the topic of the post.

How can health insurance protect your wealth? I mean, isn’t health insurance something which one buys for health?

Yes it is.

Before we move forward with our discussion, please think and answer the following 3 questions:

Q1: Will buying a health insurance help you stay healthy?

Q2: Will not buying a health insurance, result in your poor health?

Q3: If not for health, then why am I even bothered about this whole concept of health insurance?

Got it?

I am sure you have the right answers. But for the sake of making this post look complete, I will tell you the answers to first two questions.

And the answer is NO for both.

Buying a health insurance will not help you stay healthy.

Not buying a health insurance, will not make you unhealthy.

Wasn’t that obvious?

And now when you think of it again, it might seem strange that you never buy health insurance for good health. And to be brutally honest, majority of people buy it for tax benefits!!

But I am telling you…. One visit to a hospital without health insurance and you are sure to realize the importance of health insurance! I have seen it happening and it can be ugly. Really ugly.

So…

What exactly is this Health Insurance?

Simply speaking, it is an insurance coverage that covers the cost of an insured person’s medical and surgical expenses. Sowhen you buy a health insurance policy, you are paying a small premium now, so that you don’t have too pay large hospital bills (if any) in future.

That’s it.

Health Insurance is neither a tax-saving product nor an investment. It is just a contractual promise by the health insurer, to pay a part or all of your hospital bills in case there is a need. Though there are many clauses and terms and conditions that govern this contract, we can ignore them for the sake of keeping this discussion simple.

So the whole point is that you don’t want to pay the large hospital bills. And rightly so. Who wants to pay them? No one.

But let us suppose that for some reasons, you don’t buy health insurance. And unfortunately, you get hospitalized and the bill to be paid is Rs 10 lacs. Now your health is not insured. So there is no one to pay the bill, except you. So you end up paying the bill by liquidating fixed deposits, selling shares, gold, etc.

Result is that you lose a major part of your wealth that you had accumulated.

Had you had a health insurance policy, you could have easily saved your wealth from being used up in paying medical bills!

Now think…

 

Doesn’t buying Health Insurance help protect your wealth?

It does. No doubt about that.

Lets take another example to drill down this concept.

Now once again, you get hospitalized and the bill is Rs 10 lacs. But in this scenario, you had a health plan with a coverage of Rs 3 lacs. So you end up paying the remaining Rs 7 lacs.

Better than the first scenario. But it still makes a dent in your wealth.

Now even after getting it right, i.e. having bought a health insurance policy, you end up getting screwed. And that is because you had low health coverage. The reason can be lack of adequate funds on your part, or intentional decision to save some money by taking a low premium plans offering lower coverage.

Whatever the case may be, you end up getting screwed.

I really hope that you understand the importance of having health insurance in protecting your get-rich-plans.

 

In reality, it’s all linked. You. Your Health. Your Wealth. Everything.

You save and invest to get rich. But you try to cut corners by saving a few thousands and don’t buy health insurance. Bad luck strikes. You get hospitalized. You pay the bills by selling your assets. All your savings are gone. Your get rich plan is screwed. You start saving and investing again. You buy health insurance this time. But you have lost out on the benefits of compounding, because you sold all your original assets. You can never be as rich as you could have been in first place. And that is just because you saved a few thousands by not buying a health insurance in first place.

There are quite a lot of points which come to my mind about health insurance and various scenarios linked to it. For example, what should you do if your health is already covered by your employer’s health plan, whether your policy can help you beat inflation in medical costs or not, how to buy health insurance if you don’t have a lot of surplus funds, etc. But I guess its best to dedicate individual posts to atleast a few of these thoughts and scenarios, instead of clubbing all of them in just one post. So I will be doing such posts soon.

Do share your personal experiences with health insurance and if you have more ideas that can help me further explore the concept of health insurance, then do connect through comments or mail me at stableinvestor@gmail.com