When you consider adequacy of insurance, you need to consider various insurance covers, including life cover and medical cover.
When Rajiv met his financial advisor for the first time, he started off quite confidently. He had a life cover of Rs 25 lakh and he believed it was more than sufficient for his family of three. However, when Rajiv sat down with his financial advisor, he was in a state of shock. The advisor told him that a corpus of Rs 25 lakh will have to be invested in a liquid fund as the family’s risk appetite would be too low. A safe liquid fund would earn around 5.5% annualized. If you remove the tax impact, the family would be left with about 4.5% net return on the liquid fund. That would translate into an annual post-tax flow of Rs 112,500 which translates into Rs 9,375 per month. That was when Rajiv realized the enormity of the problem because the amount would be about 1/10th of his current monthly expenses. Here is how Rajiv should go about the task.
Link insurance to your goals
In fact, Rajiv should first set out his financial goals and convert them to numbers before deciding on insurance. Life insurance policy is designed to provide security to your family in your absence. The best of financial plans are vulnerable to uncertainty. For Rajiv, insurance actually bridges that gap and gives greater degree of predictability to the financial plan. Look at insurance as a risk cover for the financial plan and therefore your financial future. This applies to life cover, medical cover and other insurance covers too.
How to decide the quantum of life insurance required?
In the above case, Rajiv has monthly expenses of Rs 95,000 on a regular basis. God forbid, if something was to happen to Rajiv, he would need to replenish this income on a monthly basis. Ideally, the basic provision should be for the basic minimum expense plus an emergency corpus. If Rajiv plans a monthly flow of Rs 110,000 from his insurance corpus, it will translate into an annual inflow of Rs 13,20,000. To earn that kind of money annually from a liquid fund paying 4.5% post tax, he would need an insurance corpus of at least Rs 2.93 crore. So his basic life cover should be around Rs 3 crore and not Rs 25 lakh. In short, Rajiv is grossly underinsured.
There is a more practical problem that Rajiv has. He is already paying a hefty premium of Rs 10,000 per month and there is no way he can pay 10 times that amount. Well, he does not have to. His premium is currently high because he has opted for an endowment policy. All he needs to do is to convert his endowment policy into a pure risk term policy. He can get his enhanced cover at approximately the same premium. He may not get anything if he survives the term, but that is not the intent anyways.
Don’t forget to insure your liabilities too
When we talk of the adequacy of insurance, we normally focus on monthly expenses and living costs. Another important factor to remember is to insure your outstanding liabilities. If you have a home loan or a car loan, then the asset is hypothecated with the bank or the financer. What happens if you are not able to pay the instalments on the loan? The bank may give you a couple of notices and then repossess your car or your apartment. That is the last thing you want your family to go through in your absence. The answer is to take a term cover to the extent of outstanding liabilities. If you have an outstanding loan of Rs 50 lakh on your apartment, then you should include the same in your life insurance.
Sounds elementary; but also buy insurance for your assets
Ensure that your property is insured for its value against uncertainties like fire, flooding, electrical faults, earthquake etc. This will ensure that any damage to your assets do not result in disrupting your family’s regular flows. These are again in the form of term policies and they purely insure the assets without acquiring any surrender value. This will be an added layer of protection for your family.
Ensure that there is adequate health cover for the family
Even if you are the sponsor of the medical cover policy, your spouse can become the sponsor in your absence and retain the medical cover. When you take a medical cover you need to balance between adequacy of cover and the cost of the cover. Ideally, use the family floater route rather than the individual health cover route as it gives you a higher cover at a lower cost.
When you consider adequacy of insurance, you need to consider life cover, liability cover, asset cover and medical cover. That is what security for your family is all about!
(By Sandeep Bhardwaj, Chief Sales Officer, Angel Broking Ltd)
(Disclaimer: The above opinion is that of the author and not of Angel Broking, and is for reference only)