Insurance requirements change with Age & Tax Benefits on Life Insurance

You already know why life insurance is important. Atleast for common people like us who still aren’t rich enough to ignore it. After all, being underinsured and dying can be tragic for the dependents.

But one of the major problems that many insurance buyers face is finding out how much life insurance to buy.

There is a simple and methodical way to easily calculate how much life insurance to buy. But most people aren’t interested in putting in the required effort. They want easier answers. They just want someone to come and tell them what to do.

If that wasn’t enough, there are tons of insurance products ranging from term plans, endowment plans, moneyback plans, Ulips and what not. So people don’t know how to actually choose the right insurance product. Among the various options to save taxes, life insurance is also one of the most popular tax saving investments options in India. But still people don’t see insurance in the right perspective.

So let’s try to change the perspective a bit – let’s see how people’s life insurance requirements change with age.

This approach will hopefully provide a different and more relatable perspective on how to decide what the right life insurance cover is.

And no, picking a random figure like Rs 1 crore life insurance is not the right way to buy life insurance. J

So let’s move on… and begin when our hypothetical insurance buyer is a young man beginning his career.

Aged 20 to 25 – Unmarried

Assuming parents aren’t financially dependent on him, there aren’t any financial liabilities or responsibilities as such on the person. It’s possible that there might be an education loan. Insurance is needed only if there is a loan or possibility of parents becoming financially dependent in near future.

How much life insurance is needed?

Buying a small insurance plan (even if it isn’t needed immediately) can be a good idea as the premiums at a young age are very low. If the income is good enough, taking a larger cover is fine too as sooner or later (after marriage), responsibilities will increase and there would be a need to increase the cover anyhow.

Aged 25 to 30 – Married

Since the person is now married, there is a need to protect spouse’s financial interests. And if still not bought, this is the right and urgent time to take life insurance. The dependency logic of parents discussed above still stands. If a car or a home loan are also there, then that should also be accounted for when purchasing insurance.

How much life insurance is needed?

A term plan of up to atleast 10-15 times of annual income + outstanding loans might be a good idea if spouse working too. Being somewhat over-insured at this stage is fine too.

Aged 30 to mid 40s – Married with Kids

Life moves on and now with spouse and kids, there is a real need to protect their financial futures. An insurance cover should be such that it takes care of outstanding loans, regular expenses of the family for atleast 15-20 years, children’s higher education costs, etc. If there is an existing life cover, then it should be topped up or additional life insurance policy should be purchased. 

How much life insurance is needed?

No shortcuts here. To correctly find out how much life cover is needed now, best to do it methodically using the method discussed here.

Aged late 40s to mid 50s: Earning Well + Kids in college

By now, the asset base would have grown substantially. Children would also be more or less on their way to become independent in a few years. Depending on how much existing savings are, it’s possible that there may not even be a need for insurance coverage as the existing assets will be more than sufficient to take care of just one risk – regular expenses of spouse in case of death of the insured person.

But since the insurance premiums won’t be too large when compared to the then income, it might make sense to continue with the existing cover for some more time. If there are any loans, then atleast that amount should be covered. It might also be a good idea to include a buffer amount for future medical expenses (for spouse) in insurance calculations too.

Aged 60 & Beyond

Mostly, the insurance need would not be there as the savings corpus would be much larger than what might be required to fund regular family (spouse’s) expenses in remaining years. Children it is assumed will be independent and not require any financial security.

So ideally, life insurance won’t be required anymore unless there is a need to leave a legacy behind.

As you can see, the life insurance needs of a person vary across different life stages.

Initially, it increases with increase in responsibilities and liabilities. But then eventually, it goes down and reaches a stage where it is not required at all.

Mostly, life insurance is not needed much beyond retirement. This is assuming enough money is saved up.

To summarize, the insurance amount should be big enough, at any given moment, to take care of the present and future financial needs of the dependents. That ways, a big insurance claim would help sort out the financial life of the dependents.

And since it’s possible to purchase a large life insurance cover at a very low premium using term plans, it also makes sense to purchase a large cover (even if it doesn’t seem to be required) early on as premiums would be low. Ofcourse there is the angle of insurance premium affordability. But if income is decent, taking a slightly larger cover is fine too.

Now there are several types of insurance products – or let’s say financial products that provide various levels of insurances. For example – term plans, endowment plans, moneyback plans, Ulips, etc.

And once you have decided the right life insurance cover amount, you have to choose a product that provides insurance. When it comes to high coverage and low premium, nothing beats a term plan. But still, a lot of people feel that they are better served by traditional insurance plans like moneyback, endowment plans, etc.

I have already written about how these products are structured and provide a mix of insurance and investment. You cannot expect to get a very big life cover at a very low premium.

Nevertheless, for a section of the savers’ community, who are conservative and aren’t too clear about the idea of ‘not mixing insurance and investments’, these products have been extremely popular.

Apart from these traditional insurance plans, the unit-linked insurance plans or Ulips are also available. Here again, one single product provides insurance with investments. So naturally, getting a very big cover without paying a large premium is next to impossible.

In Ulips, the sum assured is generally a multiple of annual premium paid and more importantly, you pay much more for the same life cover as compared to a Term plan. For example, a term plan of Rs 1 crore would cost you a few thousands every year, whereas a Ulip providing a cover of Rs 1 crore would cost you several lakhs! Yes…several lakhs!

So if you wish to go with the Ulips but cannot afford very high premiums, chances are that you will end up being under-insured. Which is extremely risky and can be disastrous for the family if you die in between.

Unfortunately, most Indians still buy life insurance to save taxes!

They are normally not concerned about ‘how much sum assured is actually needed’ and instead focus on premiums and taxes they can save.

How much income tax benefit can I get on life insurance premiums? – is the main question for many insurance buyers! J

The premiums that are paid for life insurance policy qualify for a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income tax Act.

But if the sum assured of the policy is less than 10 times the annual premium, then the buyer will get a deduction on the premium of only up to 10% of the sum assured.

So if let’s say you buy an insurance policy of sum assured Rs 5 lakh at an annual premium of Rs 63,000, then only the 10% of the sum assured, i.e. Rs 50,000 will be tax deductible and not full Rs 63,000. So any premium that is in excess of the limit of 10% of Sum Assured) won’t qualify for the tax deduction under section 80C.

This is important because a lot of traditional plans like endowment, moneyback policies or Ulips have high premiums in comparison to sum assured. So one must be careful in this regard.

This was about tax saving while paying the premiums. But what about taxes on maturity or amount paid on death?

This is an important aspect that people forget about as they are blinded by their short-term thinking and the need to immediately gratify their urge to save some quick taxes.

Most people feel that the money they (or nominees) get in later years, on maturity or death from insurance policies is tax-free. This is true to an extent. But there is a small possibility that it might not be tax-free. Yes. It’s possible.

The death benefit, i.e. money paid to the nominee on death of policyholder is exempt from taxes.

But in case of survival of the policy holder, the maturity amount may not necessarily be tax-free. As per Section 10(10D) of the Income tax Act, if the premium paid is greater than 10% of the Sum Assured, then the maturity amount is taxable. So if the premium you pay is not more than 10% of the sum assured, then you are safe. Else the amount will be taxed on maturity.

This is why when you are buying life insurance, make sure you understand and more importantly, don’t ignore the taxation of the policy on maturity (as per exemption condition stated in Section 10(10D) of the IT Act.

The actual income tax benefit available to you under Section 80C or Section 10(10D) will vary for different policies. So it makes sense to spend some time to understand the income tax benefits on insurance plans, income tax benefits on term plans, income tax benefits on endowment plans, income tax benefits on single premium plans, income tax benefits on money back policies before you sign on the dotted line.

If you wish to really know how to buy the right life insurance policy, then first you need to clear your head about what life insurance’s real purpose is.

It is not there for tax saving. It is there to provide sufficient money to dependents to live their life comfortably and achieve their real life goals in your absence.

And there are several varieties of life insurance products that people can choose from ranging from simple term plans to endowment policies to Ulips. The ideal life insurance strategy for a person will depend on what stage they are in life, their financial goals, outstanding liabilities and responsibilities.

So make sure that you don’t pick random numbers to find the life insurance amount you need and chose the right insurance policy as soon as possible.

Remember, planning your insurance portfolio (both life and health) properly is very important if you don’t want to be at the mercy of luck in your life.

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Confused with Different Types of Term Plans? Here is How to choose the Right Term Plan

When it comes to buying life insurance for yourself, the best option is to go for a simple term insurance policy. Period.

With that aside, your next question would be – which is the best term insurance plan to buy?

The answer isn’t simple anymore.

Earlier, term plans came in just one version, i.e. they paid lumpsum (sum assured) at the death of the insured person.

But now, the insurance companies have introduced many variations of these term life insurance plans.

Majorly, these variations give the policyholder different options to decide how the total sum assured is paid out to the nominee in case of policyholder’s death.

But think about it…

Why would you anyone even think about the other versions of the simple term plan?

It will become clear as I explain it in the next sections.

You will realize that just buying a Rs 1 crore term plan or some other plan is not enough. You really need to think hard about how the money will be handled after you and accordingly, choose the right version of the term plan.

So let’s move on…

Types of Term Insurance Policies in India

Let’s see how these term plan varieties differ from each other.

1 – Term Plan with Lumpsum Payout

This is the most basic version.

Let’s say you buy a term plan of Rs 1 crore. In case you die during the policy tenure, your nominee will be paid the full amount of Rs 1 crore in one go. Nothing more, nothing less.

There is nothing much to explain about this option.

The other remaining options of the term insurance plans in India take the staggered route to money payout.

2 – Term Plan with Fixed Monthly Payout

In this plan, there is no lumpsum payout. Instead, the sum assured is utilized to provide a regular monthly income to the nominee for a fixed number of years.

For example – You take Rs 1 Crore term plan. Now if you die within the policy tenure, then the sum assured is paid out as a monthly income of Rs 83,333 for next 10 years (i.e. Rs 83,333 x 12 x 10 = Rs 1 Cr).

This monthly income can either be fixed (as above) or can also be increasing one.

3 – Term Plan with Lumpsum + Fixed Monthly Payout

In this plan, a percentage of the sum assured is paid out at the time of death. The remaining amount is paid as a monthly income, which is a fixed percentage of the remaining sum assured for a fixed number of years.

For example – You take Rs 1 Crore term plan. Now if you die within the policy tenure, a percentage of the sum assured let’s say 40% (i.e. Rs 40 lac) is paid out immediately. The remaining 60% (or Rs 60 lac) is paid out as monthly income of Rs 50,000 for next 10 years (i.e. Rs 50,000 x 12 x 10).

4 – Term Plan with Lumpsum + Increasing Monthly Payout

In this plan, a percentage of the sum assured is paid out at the time of death. The remaining amount is paid as a monthly income, which increases at a pre-determined percentage on a simple interest basis on every policy/death anniversary for a fixed number of years.

For example – You take Rs 1 crore term plan. Now if you die within the policy tenure, a percentage of the sum assured let’s say 40% (i.e. Rs 40 lac) is paid out immediately. The remaining is paid out as a starting monthly income of Rs 50,000 which increases by let’s say 10% every year. So next year, the monthly payout will be Rs 55,000 and so on. Generally, the total payout in this version is more than the original sum assured.

In both the above options (lumpsum + fixed monthly payout and lumpsum + increasing monthly payout), the lumpsum % can be different as per insurer’s or policyholder’s choice. There are many plans that even pay 100% of the sum assured upfront and additionally pay a monthly income (fixed or increasing) to the nominee.

For example – You take Rs 1 crore term plan. Now if you die within the policy tenure, full Rs 1 crore is paid out to the nominee immediately. In addition, a monthly payout of Rs 50,000 is made for the next 10 years. The total payout in this version is more than the original sum assured. To be exact, it is Rs 1 crore + Rs 60 lac (Rs 50,000 x 12 x 10).

These are the major versions of the term plans that are available these days.

Now let me address the point that I raised earlier – Why would anyone even think about the other versions of the simple term plan where the payout is staggered?

Quite often, the nominees lack proper personal financial knowledge when it comes to handling large sums of money. So once they receive a large amount, they may be unable to properly manage the sudden increase in wealth and end up losing it by listening to the wrong people.

So in order to overcome this concern, many insurance companies came up with various other payout options.

This way, the nominees receive a part of the amount as lumpsum to take care of immediate concerns (like closing all loans, other big expenses in the near term). The remaining amount is paid as monthly payments over a pre-decided number of years, to replicate the regular income pattern and help smoothen the life of the nominees.

That is the major reason for the launch of these different versions.

So depending on the ability of your nominees to handle money, you should pick the adequate option:

  • If you are sure your nominee is well-versed in personal finance, then you can go for the full lumpsum payout term plan.
  • If you feel the nominee is better off not having a large amount suddenly (due to any reason you think), then you can go for the staggered-payout term plans.
  • If you feel that if your sudden death will result in financial chaos (due to outstanding loan or planned big expenses in the near term), then you can take the term plan that pays a % as lumpsum and remaining as monthly income (if you feel the nominee will be unable to handle money properly).

As you might be feeling right now, there are cases where opting for the staggered payout option actually makes sense.

Ofcourse from a purely financial perspective, it’s best to take the lumpsum and invest it efficiently and try to generate income from it for the nominees. But all decisions cannot be taken just from mathematical perspectives.

Do premiums vary for different Term Plans?

Yes of course.

Different versions of the term plan have different premiums.

To give you an idea, here is a snapshot of the various versions, with their benefits and approximate annual premiums for a 30-year old, non-smoking male living in a metro city and buying a 30-year term plan:

Types Term Insurance Plans India Premiums

The first one is the normal term plan that you know of – pays lumpsum amount (equal to the sum assured at the death of policyholder). Others are different plans paying different monthly incomes which is either fixed or increasing each year.

There are several term insurance premium calculator available online. It’s best to check out the premiums for different types of policies for yourself.

The actual premium that you will have to pay will depend on a variety of factors. If you take a policy for a longer tenure, then it will cost more. In general, shorter the policy term, lower will be the premiums. To choose the right policy term, do read what should be the ideal term insurance policy term?

And I almost forgot telling you about another variety of Term Plans that has been pitched by a lot of agents in recent times – Return of Premium Term Plan.

Is Return of Premium Term Plan Good?

A lot of people who wish to buy term plans have this feeling that since they will survive the policy period, the premium which they are paying will be wasted.

For these people, insurance companies have come up with a term plan where the premium paid over the course of policy tenure is returned back if the person survives.

At the face of it, this seems like a good idea. And this policy did address the concerns of people who thought that the term plans are a waste of money.

But if you deep dive a bit, things aren’t that great. Such policies have premiums much higher than the normal term plans.

If we were to compare a plain term plan (that only pays lumpsum amount) with a term plan (that also only pays lumpsum) with the return of premium option, then the premiums are Rs 9717 for a plain term plan and Rs 24,968 for return-of-premium term plan.

These premiums are for a 30-year old, non-smoking male buying a 30-year term plan living in a metro city.

Let’s compare these two plans a bit more.

The total premium paid is Rs 2.91 lac for plain term plan (Rs 9717 annually x 30 years) and Rs 7.49 lac for return-of-premium term plan (Rs 24,968 annually x 30 years).

In case of death during policy tenure, the nominee gets Rs 1 crore in both cases (as the sum assured is same).

But in case of survival, things change.

In case of plain term plan, you get back nothing – that is, you don’t get back Rs 2.91 lac. On the other hand in case of Return-of-Premium Term Plan, you get back your Rs 7.49 lac.

You may again feel that the return of premium plan is better. But remember that you are paying a high premium for that.

The difference between the annual premium of the two plans is a little more than Rs 15,000 (= Rs 24,968 – Rs 9717).

If you invest this difference amount of Rs 15,000 every year at just 8%, then at the end of 30 years you will have about Rs 18-19 lac. Compare this with the amount the return-of-premium offers you at the end, i.e. Rs 7.49 lac.

So the obvious conclusion is that it’s better to not purchase a return of premium term plan. You are better off with either a simple term plan (or some of its variants that offer monthly income).

Finally…

Term insurance is still the best insurance that you should be buying for covering your life. The traditional ones like endowment, moneyback insurance plans are best avoided.

But since term plans also come in various shapes in sizes, its natural to ask which is the best term insurance plan for you?

As mentioned earlier, the choice of the term plan variety is dependent a lot on how capable do you feel your nominees are in managing money. If they are financially aware, going for a lumpsum payout is best. If they aren’t and you want to provide them with a regular income for a few years after you die, then take the lumpsum + monthly income payout option. Or you can have the best of both worlds by taking two policies combining the two approaches.


Is a Rs 50 lakh or 1 Crore Life Insurance Enough?

50 lakh 1 crore life insurance

Rs 50 lakh or Rs 1 crore – these don’t seem like small amounts.

But whether these amounts are enough (for life insurance) or not is another question.

Most people are unable to calculate the right insurance amount. To be honest, many people don’t even see the need to do it… as sadly, they buy insurance just for tax-saving!

There are quite a number of ways to calculate the right insurance amount. I have discussed one such approach earlier in an article titled How to Find the Right Insurance Amount. Another option is to go for thumb rules like ‘having a cover of 10-20 times your annual income’. But the first method is preferable.

But if you were to go by the thumb rule, then if you have an income of Rs 5 lakh, then maybe Rs 50 lakh to Rs 1 crore cover is fine. But if you have an income of Rs 15 lakh, then maybe it’s not enough. Ofcourse there are other factors too. But instead of lazily deciding that Rs 1 crore cover is fine for you, I would suggest you put some effort and find out the right life cover amount.

You might still feel that a Rs 1 Crore Term Life Insurance cover is big today. But remember that you are not going to die today. And when you do die, let’s say (and hope not) after 15 years, just think of the real value of that Rs 1 crore that your family will get? At 7% inflation, it might be worth just Rs 33 lakhs. That would surely not be enough for your family then – if the new breadwinner is still not up on his/her feet properly.

I am not saying that buying a Rs 50 lakh cover or Rs 1 crore insurance plan is wrong. I am just saying that it might not be enough for many people.

And don’t even think about buying such large covers using endowment or money back policies. You will be shocked to see the premiums.

Here is a sample:

Endowment Plans (LIC)

To get a life cover of Rs 1 crore for 30 years (when age of the insured person is 30), the total annual premium comes to around Rs. 3-4 lakhs

Moneyback Plans (LIC)

To get a life cover of Rs 1 crore for 25 years (when age of the insured person is 30), the total annual premium comes to around Rs. 4-5 lakhs

Term Plans (LIC)

To get a life cover of Rs 1 crore for 30 years (when the age of the insured person is 30), the total annual premium comes to around Rs. 20-30,000

Term Plans (Private Cos.)

To get a life cover of Rs 1 crore for 30 years (when the age of the insured person is 30), the total annual premium comes to around Rs. 10-15,000.

(I took these figures from various company websites)

I don’t have anything else to say. 🙂 The difference in premium says everything.

Term insurance is the cheapest way to buy a large and adequate life cover.

Many people don’t feel like buying term insurance, even when it’s so dirt cheap – just because they get nothing in return for the premiums they pay when they survive the policy term.

Since they are 100% sure that they would not die early, they want to invest in insurance 🙂 policies that offer something on maturity. I don’t know what to say. I have written about it already in detail here. Hopefully, such people would realize what is right before it’s too late.

Then there are many people who are actually surprised as to how and rather why the insurance companies pay Rs 1 crore when they are only giving Rs 10-15k as premium annually? They seriously feel that if such policies are being offered, then that means that insurance companies are fools.

But No… the companies are not fools. They are simply using the law of averages to run their insurance business. If 100 people take a term plan for 20 years and pay premiums regularly, not all will die in this 20-year period. Right? In fact, it’s possible that just 3-4 people would die. So the insurance amount (death benefit) is to be paid for just those few people, whereas the premiums are being paid by everyone! That’s how insurance works and that’s why it’s so profitable (ask Warren Buffett and you will know how he built his empire using insurance money.)

Coming back to premiums, there is a way to further reduce premiums.

By creating life insurance ladders – it’s a way of splitting insurance based on requirements like expenses, tenure of financial goals, outstanding loans, etc. But that’s not what I generally recommend. But still, it’s an interesting discussion. I will write about it some other time.

So that’s it from my side.

Do not hesitate in buying a Rs 50 lakh or Rs 1 crore insurance policy if you don’t have that kind of cover right now. Just ensure that it’s a term insurance policy. And better still, do use this method to find out your correct insurance requirement. After that, you can decide what you want to do.

Also, if you wish to create a corpus of Rs 1 crore by saving regularly, you can use the below links to see how it can be done: 

  1. Saving Rs 1 crore using PPF (PPF Crorepati)
  2. How much to invest in mutual funds per month to get Rs 1 crore in 20 years?

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.


Real Life Example – Tragic Consequences of being Under-Insured

ignoring life insurance

This is a sad example.

And of a close relative of mine.

Without disclosing the real identity here, I hope this example can help convince those – who still have doubts about having a big enough life insurance cover.

Almost a decade back, one of my relatives died unexpectedly at a not-so-old age of 44 years.

Apart from the emotional upheavals that the family had to go through, there were few other big problems:

  • He did not own a house and was staying on rent in New Delhi – a costly city.
  • He was the sole earner of the 4-member family.
  • Son was 16 and daughter was 9 years old (both studying and years away from earning themselves)
  • Wife had never worked before.
  • Sadly, he did not have much savings.
  • Worst, he did not even have a decent enough insurance cover. (Just a couple of lacs in useless endowment policies. No cover from his private employer too).

Today after almost 9-10 years of his death, the situation is still not great. The family of three still stay in a rented house, the son has only recently started earning decently and daughter is yet to complete her education. After death of the person, his wife did try to seek employment but it did not work out.

You might be thinking about how then they were able to sustain for so many years? Lets just say that our extended family pitched in and did what was necessary. But I hope you got the picture.

Now read through the list of points (i.e. problems) above again.

Read it?

You would agree that it was an extremely sad and all the more scary situation to be in.

I completely understand that there is no point trying to look for faults in past action of people. But there are others that need to realize the importance of life insurance today.

How different would have been the family’s situation if this relative of mine was properly insured?

A lot different…

Maybe, the money received from insurance could have been used to purchase a house (no future problem of rent). Or it could have helped in paying the exorbitant fees of the children. Or it could have helped provide for everyday expenses of the family. Or all of these!

That is what insurance is there for. Isn’t it?

Its not for tax saving. Its not for investments. Its not for savings. It is there to help the family after death of the insured person.

I know this example is not uncommon. Lacs of people die every year without adequate life insurance. Sadly, it is their families that have to bear the consequences.

Many feel that a small cover (of lets say Rs 5 or 10 lac) is enough. In a way, they are saying that having an ‘inadequate’ life insurance is still preferable to dying with zero life insurance.

I agree. But not completely

When one can easily buy a big enough cover (Rs 1 Cr life cover can be bought in less than Rs 10,000 annually), there is no excuse to having an inadequate life cover.

If you are well covered and know how much life insurance is right for you, then good for you. But if not, then you are not being responsible to your family. No excuse whatsoever can justify your stand of being under-insured.

Just try visualizing a scenario of your own death – imagine the issues your spouse, kids and family will have to face just to maintain their current life style and achieve other financial goals.

You will feel like you have been punched in the face.

Taking care of your family even after your death is your responsibility (atleast to an extent). Don’t shirk it.

PS – If you know someone who still doesn’t believe in life insurance, do share this article with them. The more people read this, better it is.