Five insurance covers you should have

So take a break from decorating your homes and buying gifts for your loved ones to review your insurance portfolio. If you have these five essential covers, you need not worry, but if you don’t, you know the first thing you need to do the day after Diwali.

Life insurance

Are you married? Have kids? Have parents with meagre pension? If your answer is yes to any of these questions, life insurance cover is a must for you. As an earning member of your family, you need to insure yourself so that your dependants can lead the same lifestyle in case you were to die.

What to buy? For this need, we recommend a term plan, which only includes the cost of insurance. If you die during the term, your nominees get the sum assured but if you survive the term, you get nothing back.

It’s possible that you are more familiar with unit-linked insurance plans (Ulips), money-back or endowment policies. In these plans, your premium not only includes the cost of insurance but also an investment component and usually both the elements of insurance and investment come at a cost.

How much do you need? This shouldn’t be guided by the tax incentives on premiums but by your income. As a rule of thumb, financial planners recommend that you have a cover equal to 12-15 times your annual expenses or 8-10 times your annual income. If you have a debt, such as a home loan, factor in that too when calculating your cover. To cover your loans, you could consider buying a decreasing term insurance plan. This policy is cheaper since the sum assured in this plan decreases as does your outstanding loan amount with time.

Whom to buy from? You have two choices: going online or through an agent. Buying through an agent would mean paying him a commission, which is a part of the premium that you pay. You can save this cost by picking the policy online. Insurers save on commission and other administrative cost which they pass on to you. “On an average online policies are cheaper by 65% but if you are young and healthy you get a cheaper policy," says Deepak Yohannan, chief executive officer, MyInsuranceClub.com, an online insurance portal.

Health insurance

With hospitals increasingly resembling 5-star hotels, the bills have taken the same course. Therefore, a health insurance cover is a must for all the members of a family.

What to buy? Typically, there are two types of health policies: one that pays for hospitalization and is called an indemnity policy and the other that pays a defined sum on defined medical procedure and is called a defined benefit plan.

We recommend an indemnity policy. It pays for your hospital bills and also reimburses expenses incurred before and after hospitalization.

Porting your policy: If you already have health insurance, you may want to review it. If your health insurance comes with sub-limits or has an expiry date (the maximum age at which the insurer will not renew your policy), you may want to move into some other policy. The good news is health policies are now portable. So you can port the waiting period on pre-existing ailments and certain other specified ailments to the next policy. For instance, if you have spent two years in the previous policy, the new insurer will waive off two years of waiting period from the new policy.

However, the new insurer will still need to underwrite you afresh. That means it may not work for very old people. Says Mahavir Chopra, head, e-business and personal lines, Medimanage.com, a health insurance portal, “Portability will not work for older people or people with claims. That’s because for the new insurer, it will mean a higher risk and so the insurer may choose to not insure you at all."

How much do you need? Not only do you need to look at what your policy covers but also how much. Unlike a life insurance policy where sum assured can be assessed by some thumb rules, cover in health insurance is difficult to arrive at, but going by the average cost of major surgeries a sum insured of at least 4-5 lakh is important.

If your policy has a lower sum insured, you can consider top-up plans. These are regular indemnity plans that cover hospitalization costs but only after a threshold limit. In insurance parlance, this limit is called deductible. So if your hospital bill exceeds the deductible during a single incident of hospitalization, only then does the top-up plan gets triggered.

If you wish to opt for a floater plan, which considers an entire family as one unit, you could consider restore plans that have become popular recently. These plans restore the basic sum insured for subsequent hospitalization due to new ailments or accident after the cover is exhausted in a policy year.

Once you have taken care of your basic health insurance plan, you can supplement your health insurance needs with defined benefit plans. Go for a critical illness plan or a major surgical plan that covers maximum illnesses or surgeries.

Personal accident cover

You would have seen this cover bundled with other financial products such as a credit card or as a rider with a life insurance policy. But in that form, it usually does not provide what it promises. “Personal accident that comes with credit cards usually have a very small cover. The big cover is reserved for accident due to air travel. Also, it is usually a death cover and not disability cover," says Rahul Aggarwal, director, Optima Insurance Brokers Ltd.

A personal accident cover offers you a financial compensation if you meet with an accident that leaves you permanently or temporarily crippled. A personal accident policy has four covers: death, permanent disability, permanent partial disability and temporary total disability. For death or permanent disability, it pays you lump sum compensation, which is typically 100% of the sum insured. For permanent partial disability, it pays a portion of the sum insured and for temporary disability, it pays a weekly compensation usually up to 104 weeks. However, the weekly compensation is not much. “Usually, the weekly compensation is 1% of the sum insured and is capped at 5,000. This cover is not very popular so insurers haven’t revised the benefits. But some insurers offer a higher compensation," says Aggarwal.

Cover amount: Your income and profession determines the maximum personal accident cover that you can get and the premium that you would need to pay. Typically, the maximum cover you can get is 10 times your annual income. The premiums you pay typically depend upon your profession. There are three risk categories that grade your profession. Despite the gradation, a personal accident is an affordable policy. “The premium is around 150 per 1 lakh of cover for non-hazardous professions," says Aggarwal.

Householder’s insurance

If you have a house of your own and don’t have home insurance, you need to pick one as soon as possible. This cover protects your home from unpredictable events. You can opt for a basic fire insurance policy. This policy covers financial loss due to damage to your house and its contents on account of fire and other allied perils such as earthquake, lightening, storm, floods and riots.

Types of cover: There are two ways of choosing a cover. One: market value less depreciation. Two: its reinstatement or reconstruction value. “The depreciation is evenly spread over the life of the building. For instance, if the building has 50 years of life, it will mean a depreciation of 2% every year. So if insurance policy is taken in 10th year on market value basis, then 20% will be deducted from reconstruction cost of property to arrive at the market value of the building which will be sum insured under the policy," says Anupam Ashesh, head, underwriting, consumer lines, Tata AIG General Insurance Co. Ltd.

Reinstatement cover means that the insurer will cover the cost of reinstating the damaged portion of your house. Opting for reinstatement is useful but remember that the claim is paid out fully only when the building is reconstructed.

Comprehensive plan: If you want to cover the contents of your house for burglary or breakdown of electronic equipment, you can take a comprehensive health insurance policy. This is, typically, called the householder’s package policy. There are 10-12 sections in this policy to take care of various risks. These also include covers such as public liability, personal accident policy and workmen’s compensation cover. “A householder’s package policy automatically covers on reinstatement basis," adds Aggarwal.

Choosing more covers give you a discount on premiums. “Typically if you choose more than five sections you can get a discount of 5% on the entire premium. If you choose more than eight, you can get a discount of 10%," says Aggarwal.

Cover amount: But you need to adequately insure the house else the insurer will penalize you. “The customer needs to give us the reinstatement cost of the house. That’s often a big challenge because if the insurer under-insures the house, we will pay the claim in the same proportion," says Ashesh. So if the cost of construction of your house is say 1 crore and you take a cover of say 50 lakh, under insurance by 50%, and make a claim of say 10 lakh the insurer will only pay you 5 lakh.

Car insurance

In addition to taking a third-party cover, which is mandatory, you need to cover your car against any damage. A comprehensive car insurance policy covers not only your liability towards a third party but also pays for damages to your car and to the passengers in case of death.

The own-damage cover insures your vehicles against theft or damage and passenger cover insures the lives of the passengers of the car. The structure and benefits of a comprehensive policy usually stay the same across insurers but now you can add more to your policy by opting for add-on benefits. The ones that need mention are depreciation cover and return-to-invoice.

Insurers don’t pay the cost for replacing certain parts of your vehicle but only the depreciated value. A depreciation cover pays the remainder to replace these parts. The rate of depreciation of certain parts of the vehicle is standard. So for rubber and plastic parts, such as tubes, batteries the rate of depreciation is 50%. For fibre glass component, it is 30% and for other metallic and wooden parts of the vehicle, the rate of depreciation varies as the car ages. So in year one, this rate of depreciation is 5% and it goes up to 50% by year 10.

Return-to-invoice cover applies the same logic, but to the car as a whole. In case of complete damage or theft, the insurer pays insured depreciated value or IDV. With this cover, the insurer will pay the ex-showroom price of the car. But remember these add-on benefits are not available to you for more than five years. Other covers that offer engine protection, no claim bonus protection or offer you a daily allowance or a substitute vehicle for the time your car is being repaired can also be looked at.