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Is your health insurance coverage adequate?

  • Marisha Bhatt
  • Feb 18 2022
  • 6 minutes
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How much insurance do I need? Every insurance buyer has this one question while buying a life or health insurance policy. While deciding the insurance cover, it is important to note that the main objective of insurance is to offer financial support to the insured’s family and/or dependents, in the event that he/she meets an untimely death or is unable to earn due to a permanent disability or illness. The insurance cover one chooses should be sufficient to help his/her family maintain the standard of living that he/she would have provided.

To choose the right cover and secure one’s family’s future, an individual will have to make a smart and well-informed decision in the present day. As a first step, they can begin by identifying personal financial goals and estimate the insurance cover required to meet those goals.

What is adequate insurance coverage?

A life insurance policy comes to the financial support of the insured’s dependent family members post his or her death. There are many ways in which one can ascertain the financial support required from an insurance perspective. However, as a thumb rule, one must have life cover that is at least 10 times their current annual income. 

For example, if an individual’s current annual income is Rs. 10 lakhs, he/she should have a life insurance cover of at least Rs. 1 crore. If the cover is less than this amount, chances are that he/she is underinsured. Another way to ascertain appropriate life insurance cover is by using the Human Life Value (HLV) method. In the HLV method, one needs to take into account the current income, expenses, potential future responsibilities, and personal goals for determining the insurance requirement. HLV calculators are easily available online for use.

While there is no ideal cover for health insurance of an individual, there is a commonly accepted rule in this regard. An individual’s health cover should be a minimum 50% of his/her present annual income. Most insurance experts recommend a minimum health cover of Rs. 5 lakhs considering the rising medical costs these days. One can have a similar sum assured as a Family Floater that covers family members.

When is life cover considered inadequate?

There are several reasons why a life insurance cover may be inadequate for an individual. Listed here are some of them:

  1. If an individual had taken life insurance several years ago and there has been substantial changes in his life like marriage, birth of children, retirement of parents, etc has since not reviewed it, there are higher chances that he/she would be underinsured. 
  2. With time, an individual’s income, expenses, and the family’s lifestyle could change significantly, making the insurance cover insufficient for their lifestyle.
  3. Personal financial goals also keep changing. Therefore, the life cover taken several years back may be inadequate.
  4. One more reason for a life cover being insufficient is the impact of inflation on one’s insurance needs. 

In the long-term, one’s life insurance needs should be adjusted as per the inflation rate. In absence of such adjustment, the existing insurance may not effectively meet the future needs of its beneficiaries. At times, people end up paying hefty premiums towards traditional life insurance policies such as endowment plans. However, they may pay little attention to the sum assured. Thus, their life insurance cover falls short of actual requirements.

How to choose an adequate insurance cover?

Here are some tips that individuals can adopt to ensure that they select adequate life and health insurance cover:

  • To be adequately insured, one should adopt the habit of regularly reviewing insurance needs. This could be done every 2, 3, or 5 years.
  • In case of a change in family structure, for example, due to marriage or children, one should reconsider the existing insurance cover. If needed, he/she may increase the coverage.
  • If an individual has recently taken a fresh loan that was considered while buying existing insurance coverage, it is best to increase the life cover. Thus, if something happens to the insured individual, the dependent family members don’t need to take the additional burden of paying loan EMIs.
  • It is also advisable to separate insurance needs from investment needs. Pure life insurance products, such as a term plan, can offer a comprehensive life cover as compared to an endowment policy within the same price range. Term plans provide complete protection and are often cheaper than traditional policies, especially if one buys them at an early age.
  • By keeping investment separate from insurance, one can also enjoy greater flexibility in investments depending on personal financial goals, risk appetite and liquidity needs.

Conclusion

People often mistake life insurance as a tax-saving tool, ignoring its features and measuring personal needs. This way, they end up buying the wrong product and inadequate cover. Therefore, it is important to separate insurance, investment, and tax-saving needs. Insurance needs keep changing with age, changes in income, lifestyle, inflation, etc.. One must factor in these changes and make life or health insurance purchases to ensure adequate protection.

FAQs

  1. Is it worth buying health insurance in India?
    Health insurance is worth buying since it covers extra expenses arising out of medical emergencies and offers the benefits to claim money from the cover. COVID has been a real eye opener to many people who considered health insurance as an unnecessary expense. 
  1. What is the difference between insurance and investment?
    Investments are designed to take care of one’s present and immediate future needs. Insurance is required for financial support for an individual and his/her dependents in the long run, in the event that either the individual meets an untimely death, requires expensive medical care, or similar unforeseen circumstances arise.
  1. How much does health insurance cost in India?
    Most people opt for health insurance covers for themselves or their families for approximately Rs. 7-9 lakhs. For 2 adults and 2 kids, a minimum sum insured of Rs. 10 lakhs is preferred, but this may vary depending upon your needs and financial condition. . 
  1. How does term insurance work in India?
    A term insurance policy ensures financial security for one’s family and covers future liabilities in the absence of the insured. Term insurance generally costs less than life insurance and the dependents can get financial benefit only in the event of the life insured’s death. Term insurance does not pay any maturity benefit.
  1. Is it compulsory to insure your car?
    As per the Motor Vehicles Act of India, it is mandatory for all vehicles operating in any public space to have a motor vehicle insurance cover. Policyholders are required to have at least ‘third party liability’ motor insurance cover even if the basic insurance plans are in place.

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