Life insurance, health insurance, accident insurance and critical illness insurance are tailor-made fortification products that help a family tackle unpleasant and unexpected developments. Be it expenses due to hospitalization, or loss or decrease in income due to death, accident or a critical illness. I refer to them as fortification products because they protect the families long-term goals like retirement, children's education, marriage etc. They protect by minimizing the chance of redeeming the corpus meant for these goals. They protect by minimizing the chances of interrupting the compounding of the corpus.
Here are some thoughts on the fortification process.
A emergency fund is also a crucial fortification step but we do not have a tailor-made product for this and nor is it necessary. As long as we can find a way to replenish the emergency fund when it is used, where we put the fund is pretty much irrelevant. Of course the chosen instrument must be liquid.
The problem is the amount! (see below)
Pure Term Life Insurance
Those who realize a term plan is crucial either choose to seek a one Crore policy or worry about the how much insurance cover is required.
Unfortunately both approaches do not count for much because the insurer has an upper limit typically based on an individuals income and risk profile.
Therefore, I think it would be best to identify 2/3 insurers one is comfortable with, write to them with basic profile details and determine the maximum cover they are willing to offer.
Then write an action plan: How much should I allocate for
- squaring off liabilities
- inflation protected income and for how many years (perhaps until the kids are old enough to work
- generating an inflation-protected sum for school fees (including training and coaching classes)
- college fees
- marriage expenses (if possible)
Use the Comprehensive Child planner to work this out: How to plan for your child’s education and marriage
Remember: having a term plan is good but what if your nominee buys wrong products? So prepare an action plan and discuss it with your nominee
Understand how best the maximum eligible sum insured should be distributed among these buckets, write it down and discuss and give copies to your nominee and someone else you can trust. Be sure to include the name of a fee-only planner (see link on the top right).
Ask your nominee to contact the fee-only planner, if needed, as soon as you are ready to submit the claim. They should be able to guide through the claim-settlement process (for a fee of course) and allocate the sum into different buckets as per your plan.
Having a health cover is indispensable. However it is important to recognize that cashless claim is more of a privilege than a right. Reimbursement is a right. So do not be sure cashless will be approved. Meaning you need money - much more than 12 times monthly expenses!
Emergency fund is a long-term goal. It is an insatiable monster which needs to be fed constantly.
Print the necessary steps to be completed before and after hospitalization and store it along with the insurance policy and card. It would be better if the spouse and other members read it.
This is a must-have for professionals and those in the cut-throat corporate world.
The product is rather complex. The claim will be paid in full only for certain types of accident. All others would only get some percentage of the sum insured.
Also one does not need to suffer an accident to lose income. There are many other ailments which would render a person disabled.
How much accident insurance should I have? If I die, family expenses might decrease as I am no longer around.
If I am rendered disable, my family expenses are likely to increase and sharply. So an accident cover should be higher than a term cover.
Unfortunately this is rarely the case.
Getting an accident insurance policy for 10,20,30L is inadequate.
Not everyone will get high cover. It depends on the income and the kind of job
The bigger problem is that many insurers offer quite low cover. The max cover I have seen is 1 Crore from Tata AIG.
The only upside is that the price of sum insured of tens of lakhs is quite inexpensive.
Stay away from any group insurance policy offered by Banks.
Critical Illness Insurance
Again a complex product. You need to get critically ill (and not die within a month) in a certain way.
Again the sum insured in most CI products is not as large as a term plan. But the policy is much more expensive than a term plan.
I would prefer to buy a CI cover if there is some history if CI in my family. But then again, do you stop with first cousins or second cousins? Search hard enough and every family will have CI case!
If all our investible surplus goes to insurance policies (that do not offer bonuses!) where will we have money to invest for our financial goals!
So we either buy all types of policies for low cover or avoid certain types of policies (CI or accident that is. Rest are mandatory).
Alas either way it is not an easy decision.
Perhaps one could buy about 30L of accident cover, 30L of CI cover and get as high a term cover and mediclaim as possible, but the total premium would be close to 1L for a 30-something.
If we are lucky, don't get to use the CI and accident policies and the health cover rarely, we can focus on investing.
If we invest to the best of our ability in productive assets, hopefully we would have more than enough to handle unexpected big ticket expenses a couple of decades later. Building a rock-solid fortification takes time and luck. Lots of both
Interested in a workshop on financial planning and goal-based investing at Bangalore?
The first meet on Dec. 14th is sold out. Register here and I will plan for a second meet