Having spent 10 years in the insurance industry, few questions that I am often asked during my training program are: how much Insurance should one have? How long should I have an insurance cover? What factors should I consider while taking insurance? Is life or medical insurance better? So, let me tackle these one by one.
While taking an insurance plan, one should consider having both life and general insurance. Life insurance will ensure your family is financially protected in case an unforeseen event like death was to occur to you. Medical insurance will help in preserving your savings, yet take care of your family in case of medical emergencies.
In Life Insurance, the thumb rule is that one should have at least 10 times his/their annual income as insurance cover. Ex: If your annual income is 6 lac p.a, consider having 60 lac as insurance. However there is another formula which may look complicated at a glance but is easy once you get the concept.
Insurance cover = (Annual Income/6)*100
In the above example, (600,000/6)*100, equal to 1 cr should be you ideal insurance. How come? Let me explain
Your family is dependent on your income and in an unforeseen event like death; your family still requires the same annual income. Hence, your insurance cover should provide your family with the same annual income you currently have.
Consider, the current FD rates are at 6% p.a. Let’s say in the event of death, your family would invest the insurance amount in a Fixed Deposit. Hence, at 6% p.a, your corpus should give an annual income of 6 lac p.a to your family. In the above formula, for a corpus of 1 cr, the family would get 6 lac p.a. The FD rates can be changed as per your understanding.
While applying for Life Insurance one should also factor in your existing liability. Hence, include your liability to the above arrived figure.
Finding an ideal General/ Medical insurance cover is tricky. While lesser cover would mean lower premiums, the insurance amount may not be sufficient to cover incase of medical emergency. While there is no thumb rule, it’s ideal to have an insurance amount that is 30% of your annual income.
Why 30%? On an average you will not be spending more than that for your medical expenses. If you are, then it might be due to serious illness of a family member or there might be senior family members who are dependent on your income.
The time period of your insurance cover depends on many factors like your liability period, retirement age, dependents etc. However one should be at the least insured up to 60 years of age.
Do put in your view and thoughts and let me know what your ideal insurance planning method is.