Our insurance requirements keep changing during the course of our lives. Your life and health insurance requirement will increase when you get married or have children. The requirement will come down as you meet your financial goals and your children become financially independent. This means you must review your insurance portfolio at regular intervals or on occurrence of specific events.
In this post, I shall consider such events or decisions that might require you to review your insurance needs. I will focus primarily on life and health insurance. However, before I move on to such events, let’s first see when you must buy life and health insurance. Can you do without life and health insurance?
When can you do without life and health insurance?
To answer this question, you have to look at the very basic concept of life insurance. You purchase life insurance to ensure that your family can maintain the life style in your absence and all your life goals are provided for.
If you have no financial dependants and liabilities, you can do without life insurance. For instance, if you are single and your family (parents, siblings etc) can do without your income, you do not need life insurance.
A caveat with this approach is that it is easier and cheaper to purchase life insurance when you are young. Say you are 23; you may get life cover of Rs 1 crore for 35 years at Rs 6,000 per annum. Alternatively, if you purchase at the age of 28, the same cover for 30 years may cost you say Rs 8,000 per annum. I wouldn’t pay much attention to this minor difference. In the first approach, you are paying lower premium for greater number of years.
The bigger issue is with your health. If you develop any illness between the age of 23 and 28, your annual premium may be much higher than Rs 8,000 per annum. In fact, you have a serious illness; the insurance company may even decline to cover you. In that case you won’t be able to purchase cover even when you want to.
You might feel you are still young at 28 and are not likely to have any illness. Well, life is fickle. You never know what can happen.
I am not saying you purchase life cover with your first salary but do keep this aspect in mind.
Your life insurance requirement is essentially the difference between your net worth (assets – liabilities) and the amount needed to achieve all your financial goals.
Hence, you can also do without life insurance when your net worth is greater than the amount needed to meet your financial goals. For instance, if the amount needed to fund goals is Rs 1 crore and you have assets worth Rs 10 crores, you don’t life insurance. You already have amassed enough wealth to care of your family even if you were no around. I assume there is enough liquidity in those Rs 10 crores of wealth.
Please understand you need health insurance irrespective of your age. Of course if you have enough wealth to provide for health care expenses, you do not need health insurance either. In some cases, because of your medical history or age, purchase of a health cover may become prohibitively expensive. In such cases, you have to explore alternative strategies for affording quality healthcare.
Now let’s look at events that might require a review of your insurance portfolio.
When you get married or have children
Most of us tend to get serious about our finances when the marriage is round the corner. Till such time, at least some of us have no financial dependents. You have not taken any loans. Hence, life insurance may not be as big a priority before marriage.
However, once you get married, you are financially responsible for at least one other person. It may not be true in case both husband and wife can do without income from the other partner. But you must review your life insurance requirement and make an informed decision.
When you have children, you responsibilities increase leaps and bounds. You have to start investing for their education from day one. Amidst this rush for investments, don’t forget about life insurance. Your spouse may not have enough to invest for children’s education and other needs if you are nor around.
Your life insurance requirement will increase when you have children. So, review your life cover and purchase additional life cover if required. Subsequently, think about investments.
Read: How Life Insurance Ladder can reduce your premium outgo
Read: Income Replacement Term Insurance Plans
A few insurance plans such ICICI Prudential IProtect Smart Life Cover allow you to increase life cover at various life stages such as marriage and birth of child.
Additionally, you must ensure that all the dependent members of the family have adequate health insurance. For instance, you must include your spouse in your employer/personal health cover if your spouse is not covered under any health insurance plan. Alternatively, you can also purchase an individual health insurance plan for your spouse.
Do consider the amount of coverage. A cover of Rs 5 lacs may be enough for a single person but may be grossly inadequate for a family of four.
When you take loans
Most of us difficult can’t afford a house without taking a home loan. In case you cannot repay the loan, the bank can auction your house to recover its dues. You want to leave behind a house for your family and not a housing loan. Your life cover should be enough to square off this loan. So, if you need Rs 1 crore to provide for your life goals and maintain family life style and have a home loan of Rs 50 lacs, your term life cover must at least be Rs 1.5 crores.
In case you have gone for a joint loan with your spouse, both the earning members should purchase adequate life cover.
Point to Note: Rather than purchasing home insurance plans offered by the banks, opt for a pure term plan. Insurance plans sold by banks are quite expensive. Go through this post on EMICalculator for more on this.
Taking a home loan won’t change your health insurance requirement.
When you opt for a more expensive lifestyle
When your income rises, you may shift to a locality where cost of living is higher. For instance, rent may be higher, maintenance charges may be higher, fees in nearby schools or treatment in hospitals may be on the higher side. In short, your monthly expenses may increase because of such decision.
Your life insurance calculations must reflect such changes in lifestyle.
Only life and health insurance?
Though I have limited myself to life and health cover in this post, you must think about other covers too to guard against financial hit. One of the most important is a Personal Accident Cover. Life insurance takes care of your family’s finances in the event of policyholder’s demise. Health insurance plan will take care of hospitalization expenses.
But what about an accident that leaves you permanently or temporarily disabled and compromises your ability to earn? In such a case, not only do you have to manage without regular income, but you may also to have to churn out extra for nursing care. This is where a personal accident cover can help.
Read: Do you need a Personal Accident Cover?
If you have purchased a house, you may also consider property insurance.
What is your life insurance requirement?
There are many calculators available online. You can use those calculators to arrive at your life insurance amount. I have also prepared an excel based calculator. You can try your hands at some of these calculators to arrive at your life insurance requirement. You can also seek professional help from a SEBI Registered Investment Adviser.
A few planners ask to have life cover of 10-15 times your annual income. It is a decent heuristic but I am not very comfortable with this approach. Just because you are earning less does not mean your life insurance requirement is any lower. I prefer needs based approach.
PersonalFinancePlan Take
There are certain life stages which might require you to review your insurance requirements. Even otherwise, review your insurance requirements on a regular basis. If you go wrong with your investments, you can still manage. However, if you go wrong with your insurance portfolio, your family might find it very difficult to manage in times of such emotional stress.
For meeting your life insurance requirement, purchase term cover only. Stay away from traditional life insurance plans. To meet your health insurance requirement, look beyond your employer group health cover.
Image Credit: Ilya, 2009. The Original Image and information about usage rights can be downloaded from Flickr.
