5 must-have insurance covers

Term insurance, health insurance, personal accident insurance, critical illness cover and home insurance policies can help you protect against the risk of financial loss.

The essence of insurance is to protect against the risk of financial loss. It is meant to cover those risks which may knock at your door without a warning. This could be risk of death, risk to health or risk to property. However, for most people who buy insurance, the purpose is grossly misunderstood. The eagerness to oblige the insurance agent who may be a close relative or friend and the temptation to get some money back, often leads to faulty choices with respect to insurance products.

There are a wide variety of insurance products available in the market today covering different kinds of risks an individual or family may be exposed to. The most common and sought after plans are those relating to life insurance and health insurance. Knowledge of different categories of insurances is crucial in identifying what risks you need to cover and which plan may be best suited to cover that risk.

Let us look at the different kinds of insurance plans available in the market and what kind of risks do they cover.

Life insurance

The first thing an individual needs to assess before s/s/he even looks at various life insurance products is ‘whether s/s/he needs insurance’ and ‘how much does s/s/he need’. Answering these two questions correctly can often lead to buying the right plan at the right time. Unfortunately most people perceive life insurance as a channel to invest money rather than get a life cover. Hence they end up buying expensive products which neither cover the risk to life nor give a decent return.

The objective of life insurance is to ensure that in your absence, your spouse (or any dependent) will have enough money to maintain a decent standard of living till her life expectancy, be able to pay off any outstanding liabilities and also be able to meet all critical goals such as the need to educate children, their marriage etc. The amount of cover required by an individual to fulfill all the above needs may be quite large and it is unaffordable if one tries to get ‘money back’ kind of plan for it.

Term insurance is the right way to cover the risk to your life. It provides a large amount of cover at a low cost.

Term insurance covers the risk on an individual’s life for a specified term, which can be chosen to align with the working years. In case of death of the policyholder during the policy period, the dependants receive the sum assured. If the policyholder survives the term, no payment is made. Since the objective of term policy is to only cover risk, it usually comes at a lower premium compared to other products.

A must have product for any individual who needs to be insured for life. Some insurance companies offer online purchase of term insurance, thereby eliminating the agent’s commission and bringing down the premium cost by 30 to 40 per cent. For example, Rs 50 lakh cover for a period of 30 years old could cost all of Rs 5,000 per annum.

The author is Chief Evangelist, Perfios.com 

Health insurance

Health insurance provides coverage of medical expenses to the insured person in case of hospitalisation for more than 24 hours. The cover typically includes surgical operations, nursing care, doctor’s fees, pathology, diagnostic test, hospital accommodation and pre and post hospitalisation expenses. The insured in return pays specified amount called premium every year or two. Health insurance is an indemnity policy which means that insured can only claim what s/he has spent and not a penny more. One cannot profit from an indemnity policy.

Health insurance can be taken as an individual policy covering only one person or a floater policy covering several members of the family. Salaried individuals usually have a group health insurance provided by the employer either free or at a subsidised cost.

Unlike life insurance where exact requirement can be computed, health insurance has no such computation. It would depend on factors such as amount of coverage provided by employer, hospitalisation costs in the city where you live (depending on the kind of hospitals you would choose) and affordability. It is difficult to put a number to how much insurance is sufficient and may vary from family to family.

It may be prudent to take a personal insurance in addition to the company cover when you are still young and healthy. That will ensure that the premium costs would be lower, pre-existing conditions will be taken care of and you may have a claim free history with the company for a reasonably long time.

One should be careful while choosing a health insurance plan and read through the terms and conditions and fine print to know what is covered, how much is covered and what is excluded.

Personal accident insurance

A personal accident policy covers an individual for accidental death and also for total permanent disability, partial permanent disability and temporary total disability. While it provides a lumpsum amount on accidental death, it provides regular sums for a certain period in the event of disability.

A separate personal accident policy scores over an accident rider attached to a life insurance policy because it also covers partial permanent disability and total temporary disability. Unlike life and health insurance, accident insurance costs do not depend upon the age of the individual. Premiums would depend upon the occupation of the individual, for example a person working in an office in an administrative role would have to pay a much lower premium than a person working in an underground mine.

If a person is covered through his employer adequately, s/he need not go for a separate personal cover. In absence of such cover from employer, one should opt for a personal cover. The costs for a personal accident cover are quite low and the cover would generally depend upon the income of the individual.

Critical illness cover

Critical illness cover usually covers specific critical illnesses like cancer, stroke, kidney failure etc. Critical illness insurance is not a reimbursement policy; instead it pays a lump-sum benefit upon diagnosis of an illness or condition specified in the plan. The benefit you receive can be spent however you wish -- there are no restrictions or requirements.

Although the health insurance would also cover critical illness related hospitalisation, usually the costs relating to treatment of a critical illness are quite high; hence a separate critical illness cover may be useful.

This cover is a must have for those who have any history of critical illness in the family. There are different kinds of plans in the market covering few to all kinds of illnesses. This cover can also be taken as a rider with a life insurance policy or combined with health insurance cover. One may assess the costs of treatment of any critical illness typically in one’s city and accordingly opt for a suitable cover. 

Home insurance cover

This is an inexpensive cover to insure the risks to your home and its contents.

Comprehensive covers are available which cover both structure and/or contents of your home. The perils which are covered are fire, explosion due to gas appliances, bursting of water tanks, riots, strikes, earthquake, flooding, terrorism, burglary etc.

A home insurance cover is a small price to pay for insuring your home and your valuables and one must go for it.

If you can afford it, you must ideally cover all your risks through insurance. If not, start with a life and health cover and gradually add the other covers over a period of time.