A lot of people think that insurance is a waste of money. They contend that if the
premium was invested in other avenues, it would grow to a sizeable amount. But life can take unexpected turns. The
death of the sole breadwinner can transform the lifestyle of the family. A small accident can leave a person with
a disability, impairing his livelihood. The treatment of a critical illness can drain the life savings of a
family. Even 3-4 days in a hospital can leave a person with a bill equal to 10 years’ medical insurance
What price are you willing to pay for peace of mind? For the feeling that even in
the worst case scenario, your family will not have to face financial difficulties. ET Wealth estimates that a 35-
year-old needs to pay only Rs 2,620 a month to protect his family’s financial future from the uncertainties that
life can throw at him. That is the cost of five essential insurance policies that one needs.
This week’s cover story looks at these five essential covers in detail. We explain
why you need these covers and calculate the costs for different age groups and persons in various stages of life.
All these policies are very cheap. As our calculations show, the daily cost for a 35-year-old comes to barely Rs
90, less than the price a latte in a coffee shop.
The low costs is also the reason why agents don’t want to sell these policies. Ask
any life insurance agent for a term plan and he will offer you an endowment policy instead. Try to purchase an
accidental death and disability cover and you will be offered a rider along with a Ulip. Similarly, nobody will be
interested in selling a home insurance plan unless you buy costly but needless add-on covers.
Thankfully, you no longer depend on agents to sell you these policies. Most of these
plans can be bought online. Buy these covers and you can sleep easy that most of the risks faced by your family in
everyday life have been covered.
How much do these covers cost?
Life Cover of Rs 1 crore cover for 35-year-old male for 25 years
Monthly cost Rs 1,000
Health cover for family of four covered for Rs 5 lakh
Monthly cost Rs 1,000
Accident and disability cover of Rs 25 lakh
Monthly cost Rs 200
Home and contents: House covered for Rs 50 lakh; contents for Rs
10 lakh Monthly cost Rs 250
Vehicle third-party cover for 1000 cc car Monthly cost Rs
Total monthly cost Rs 2,620
WHY LIFE INSURANCE IS CRITICAL
In case of a mishap, the money will support your family and achieve all your goals
in your absence
A life insurance policy is absolutely essential because it acts as a lynchpin of
your financial planning. You may be doing all the right things— saving for retirement, investing for your child’s
education and putting away money for other goals. But have you ever wondered how your family would achieve those
goals if something untoward happens to you?
A thumb rule says one needs an insurance cover of at least 6-8 times his monthly
income. But this is a rudimentary calculation and does not take into account the liabilities of the person. The
cover should be big enough to settle all outstanding loans, provide for big-ticket expenses as also generate an
income for the living expenses of the family.
Thankfully, one needs to spend roughly 1% of one’s annual income for a sufficient
cover. Pure protection term plans give high cover at low price. A 30-year-old male will pay about Rs 10,000 a year
for a cover of Rs 1 crore for 30 years. The daily cost of the cover works out to Rs 28, less than what you pay for
parking your car in a metro.
Which option suits you?
Term plans are no longer the plain vanilla products they used to be till a few years
ago. Insurance companies have crafted innovations that suit various customers and situations. Worried about
inflation? You can buy a plan where the insurance cover increases every year. Won’t be able to spare money later?
Buy a single premium policy that does not require you to pay for the entire term. Your nominee is not investment
savvy? Insurance companies now have policies that don’t give a lump sum on death but stagger the payment over 10-
15 years. Think that buying a pure term plan is a waste of money? There are plans that give back the entire
premium you paid at the end of the term.
Gaurav Singh, 33, Kolkata
Dependents: Wife (33) and son (8)
Annual income: Rs 14 lakh
Outstanding loans: Rs 28 lakh
Existing life cover: Rs 17 lakh
Recommended insurance cover: Rs 1.25 crore
Additional cover required:Rs 1.08 crore
Cost of additional insurance: Rs 1,000 per month
Not all of these innovations are good for customer. Increasing the cover to adjust
for inflation is a good idea but you will pay a higher premium than a regular plan. Similarly, plans that return
the premium are costlier and should be avoided. If adjusted for inflation, what you get back at the end of 20-25
years is peanuts. The staggered payment plan is also not a good idea. If the same amount was taken as lump sum and
put in a bank fixed deposit, it would generate a higher income than what these plans offer. But these plans may be
useful for families where the dependents are not very financially savvy and could be cheated by greedy relatives
and unscrupulous advisers.
Apart from the size of the cover and the payout structure, you should also be
careful about the tenure of the policy. In their advertisements, insurance companies highlight premium rates for
short-term plans. If someone buys a 20-year plan when he is 30, the premium will be very low but the plan will end
when his insurance needs are very high. At that age, a new policy will cost him a bomb. He might even be denied
the cover if his health is not good. Don’t take a 15-20 year plan that will terminate when you are in your 50s.
Buy a cover till the age of at least 60-65 years.
Not everybody needs to buy life insurance. If you are single and your parents or
other relatives do not depend on your income, you don’t need to buy life insurance. No one will be financially
impacted if you are not around. At the same time, if you intend to get married, it is a good idea to buy life
insurance and lock in at a low premium when you are young and in good health.
Reviewing your cover
You also need to review your insurance cover at various stages of your life and when
you take big-ticket loans (see box). If you have taken a home loan, be sure to take a term cover equal to that
amount. In case of an unfortunate turn of events, your family will be rendered homeless if they are not able to
service the EMI. However, don’t take a mortgaged linked insurance plan. It is better to take an independent term
plan which will continue even after the loan has ended.
The premium rates given in the table assume that the buyer carries the normal risk
in terms of health, family medical history and occupation. If he suffers from any ailment that can potentially
become life threatening or if there is a family history of a medical condition, the premium would be higher. If he
smokes or chews gutkha, the premium will be roughly 25-30% higher than that of a nonsmoker.
Don’t lie when buying
Buyers should not try to hide these facts in the application. If the insurance
company finds out that a policyholder concealed information that affected the risk to his life, out goes the
claim. Most companies have medico-legal experts who scan the claim documents for any attempt to mislead. Every
year, about 2% of the claims received by life insurance firms end up in the trash can. Your insurance policy is
the bulwark of your financial plan. Don’t let it be rejected just to save a few hundred rupees in the
GUARD AGAINST MEDICAL COSTS
Your family needs a comprehensive cover against hospitalisation expenses.
The second most essential cover for you is a medical insurance policy. Some experts
even say that medical insurance is more important than life insurance because the probability of a family member
needing medical care is higher than the death of the breadwinner. Medical care costs are rising very fast and even
a 3-4 day stay in a hospital can leave you with a bill of Rs 50,000-60,000. In comparison, the cost of medical
insurance is only Rs 10,000-15,000 a year. If you take into account the tax benefits offered on medical insurance
under Section 80D, the costs for those in the highest 30% tax bracket are much lower at Rs 7,000-10,500 per
Avoid costly innovations
When buying medical insurance, don’t fall for innovative plans that promise you
plenty of advantages. Most of the time the exclusions are not explained to the buyer and he ends up paying extra
for a benefit that won’t come to him. Even if you read the fine print, you will not be able to understand the
legalese and jargon used by the company. This is why a plain vanilla indemnity policy, which allows cashless
hospitalisation or reimburses the expenses incurred, is the best medical policy you can buy.
Even if you want additional coverage, choose a policy that offers relevant benefits.
A policy that offers maternity benefits will be of no use to a couple not planning to have children. A simple
floater plan will be a much better option for them. If there is an elderly person in the family, it’s best to buy
a separate insurance for him. This is because the premium of the floater plan is linked to the age of the oldest
member and will bump up the overall cost of the insurance.
Is group cover sufficient?
Some people don’t buy health insurance because they are covered by the group cover
from their employer. While group covers are helpful, they are usually not sufficient. There are a lot of
exclusions and co-pay clauses. Besides, they are available only till you are an employee. When you change jobs,
the medical cover also goes, leaving you vulnerable. This is why planners suggest that you buy medical insurance
cover on your own.
Delhi-based Balbir Kaur never considered buying health insurance on her own because
she and her family were covered by her company’s group medical policy. But when she changed jobs in 2014, her new
employer did not offer the same benefit. She bought a floater cover of Rs 3.5 lakh and pays a premium of Rs 6,500
a year. “The medical insurance cover was essential because my husband is a self-employed professional and has no
group cover,” she says. The cover has been enhanced to Rs 4.5 lakh due to no claims in the past two
Balbir Kaur, 37, Delhi
Health insurance cover: Rs 4.5 lakh
Annual premium: Rs 6,500
Her husband is a businessman and her employer does not offer group medical cover.
She has therefore bought a floater plan to cover the entire family.
If you have group cover but want to enhance the cover, you can buy a top-up plan.
Top-up plans are very cheap because they kick in only after expenses cross a certain threshold. If your group
cover is for Rs 3 lakh, buy a Rs 2 lakh top-up plan with a Rs 2 lakh threshold. In case of hospitalisation, the
initial expenses of Rs 2 lakh will be borne by your group cover. If expenses exceed Rs 2 lakh, the top-up plan
will come into play.
Cost of health insurance
Buyers will need different types of covers at various stage of life.
Do you need a critical illness cover?
A simple medical insurance plan may not be able to pay for the treatment costs of
While a medical insurance plan reimburse normal hospitalization expenses, the cover
may not be sufficient for some illnesses. The cost of treatment of certain critical illnesses such as heart
ailments, cancers and liver diseases can be very high. For instance, a liver transplant can cost Rs 18 lakh. In
many cases, the treatment can continue for years, draining the finances of the household.
You can buy a separate cover against critical illnesses or take a rider along with a
life or health insurance policy. Though riders are cheaper, they don’t offer as much cover as a standalone
critical illness policy. The best part is that these standalone critical illness plans and riders pay out a lump
sum when the disease is diagnosed, which can be very useful for a policyholder.
It is best to go with a broad spectrum critical illness cover rather than choose one
aimed at a particular disease. The cancer protection plans from some health and life insurance companies are
priced lower than a critical illness plan, but will only cover one disease. Cancer is not the only ailment that
threatens you. Lifestyle-related risks include heart ailments, diabetes, kidney and liverrelated illnesses. Hence,
a wider coverage would be a wiser pick.
Buy a dedicated plan only if you are a heavy smoker or are employed in certain
high-risk sectors. But the premium for such people will also be considerably higher.
ACCIDENT INSURANCE TO THE RESCUE
Death or disability due to accident should not derail a family’s finances
Life insurance covers you against death and medical insurance pays your hospital
bills. But what if you are injured in an accident that disables you, either temporarily or permanently? Before you
answer this question, here are some statistics. India is the accident capital of the world. According to the
National Crime Records Bureau, 4.52 lakh Indians died in accidents in 2014, with nearly 1.7 lakh of them dying in
road accidents. The number of those injured in road accidents is at least three times bigger.
This is why an accidental death and disability cover is third on our list of
essential covers. The policy will pay your nominee a lump sum amount in case of death due to accident. In case you
are disabled, the policy will pay out a lump sum amount. There is an additional cover that provides a monthly
income if you are unable to resume work due to the disability.
Praful Ghildiyal, 28, Mumbai
Annual income: Rs 5.25 lakh
Accidental insurance cover: Rs 50 lakh
Annual premium: Rs 8,600 Apart from the death cover of 10 times
his annual income, the plan offers a monthly pay for up to one year if disability stops him from
PROTECT YOUR COSTLIEST ASSET
Your house needs to be covered against calamities and its contents against theft and
You have insured your Rs 6 lakh car, the Rs 50,000 laptop and even the Rs 15,000
cellphone. Now spare a thought about the Rs 50 lakh house. Though home insurance covers what is possibly their
costliest asset, very few Indians understand this and even fewer take steps to cover the risk. No more than 30-40
lakh households in India are insured against natural calamities and other disasters. This is despite the National
Disaster Management Authority estimating that 60% of the Indian landmass is prone to quakes and 8% of the country
is susceptible to cyclones.
Then there are man-made calamities like fire, rioting and larceny. All these are
covered by a comprehensive home insurance policy at an unbelievably low cost. The cost of insuring the structure
against damage is as low as Rs 40 per Rs 1 lakh. Keep in mind that you don’t need to insure the house for the
value of the property but only for the cost of reconstructing it. The costs can vary from Rs 1,800 per sq ft for a
basic no-frills structure to Rs 3,000 per sq ft for a premium construction. So, a 1,000 sq ft house should be
insured for Rs 18-30 lakh and the cost will be Rs 800-2,400 a year.
Shashank and Sonal Thakur, Mumbai
Flat size: 1,035 sq ft
Annual premium: Rs 4,500
What’s covered: Structure and contents against fire and other
perils, burglary and damage. Jewellery is covered against all risks and there is also a cover against damage due
You can buy a fire and other perils policy as a standalone cover, but most insurance
companies encourage buyers to go for a comprehensive plan that covers a wide range of risks. It’s advisable to
enlarge the cover a bit.
A fire or a flood may not damage the structure, but will ruin everything else inside
the house. So you also need to insure the contents of the house against the damage. The cost of insuring contents
worth Rs 10 lakh against natural and manmade calamities is just Rs 255 a year. Then come the covers against
burglary and breakage. These are also important and will not cost too much. You can enhance the coverage if you
perceive a risk, and if your pocket allows.
Five things your agent won’t tell you
1. Compulsory Deductible
Your policy will not compensate you fully. The first 5% of the sum assured or Rs
10,000 of every claim is not paid by the company.
2. Limits on Claims
Payment is subject to limits. Architect fees is limited to 3% of sum assured and
debris clearance to 1%. Payments to architect or engineer for processing claim papers cannot be included in
3. Jewellery Cover
Under a standard policy only up to Rs 10,000 worth of jewellery is covered. Cash not
covered by policy. To cover jewellery, you have to take a separate all-risks policy that costs Rs 10 per Rs
4. Conditions Apply
Your claim against burglary will not be valid if the house was not occupied for over
30 days at a stretch or if your household help was involved in the theft.
5. Not Piecemeal
The entire building has to be covered for earthquake risk. You cannot insure a
certain section of the house in isolation.
THE BIGGEST RISK ON THE ROAD
Third-party liability cover protects you against claims by accident
Insuring your vehicle is important because in case of an accident, the insurance
company picks up the bill for repairs. What few people know is that the insurance company also compensates victims
of accidents in which the insured vehicle is involved. This compensation can run into several lakhs of rupees and
has on occasions even touched the nine figure mark. In 2002, a court awarded Rs 12 crore to the family of an NRI
doctor killed in an accident. Even if he sells everything he owns, the average Indian driver will not be able to
pay such a huge amount.
The good news is that this thirdparty liability insurance is mandatory for all
vehicles and offers unlimited cover for injuries and death caused by the vehicle. Third-party premiums were hiked
in April this year but are still low (see table). For Rs 2,000 a year, the owner of a midsized car is fully
protected against claims by victims.
Some owners avoid buying insurance when their vehicle is very old. This can be a
costly mistake. Even if you don’t want to insure your old vehicle against theft or damage, don’t miss paying the
third-party liability premium.
Incidentally, general insurance companies have been lobbying for a cap on the
liability for several years. They contend they are losing money on third-party insurance because the compensation
is higher than the premium earned. They want that the insurance company should be liable to pay a maximum
compensation of Rs 1 lakh in case of injuries and disability and Rs 10 lakh in case of death. If the owner wants a
higher cover, he should pay a higher premium.