Which insurance covers are a must-have? Find out

Vikas is 30 and about to start a family. He has been saving regularly to meet his goals of buying a house, going on a holiday abroad, retirement and the like. He bought life insurance with a sum assured of Rs 10 lakh when he started working seven years ago. He thinks he is sufficiently covered as he has his life cover and investments to fall back on if there is an emergency. Is he right in thinking that just topping up his life insurance policy now that a baby is on the way is enough?

Vikas is right in identifying and saving for his life goals. However, he has to be around to provide the funds needed to meet the goals. In case he dies early, the entire investment process would be derailed. His family will suffer loss of income, thereby putting long-term goals and the investments meant for meeting those goals at risk.

A pure term insurance policy is apt for meeting risks arising out of untimely death and therefore, should be adequate. It must be reviewed at every life stage—like when starting a family. He must take into account inflation, his current financial situation, number of dependents and the future financial and lifestyle needs of his family in his absence.

Just as death is a possibility one cannot ignore, so is the loss of earning capacity. The personal accident policy meets the need for replacing loss of income. Vikas must look for a comprehensive policy, which covers all contingencies— death, permanent total disability, permanent partial disability and temporary total disability.

Hospitalisation due to illness, accident or a serious ailment may strike anyone in the family at any time. It could be a huge financial drain. In the absence of a health insurance plan, Vikas may not only have to dip into his savings, thereby jeopardising long-term goals, but may also have to resort to borrowing from friends or relatives in case of a shortfall. So he must cover the risk of rising medical costs by opting for health insurance while he is young.

Insurance is a risk management tool and must never be mixed up with investments as it is meant to serve a completely different purpose. It is important to identify the key risks in life and manage them through appropriate insurance covers.

(Content is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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