Opinion | It’s better to link insurance amount to your objective3 min read . Updated: 05 Jul 2020, 10:09 PM IST
At the time of renewal, assess if the coverages for life, health and home need to be increased
Your life, health and home have a value that must reflect in the amount of insurance you buy. Determining this amount can be an art. In life insurance, a large number of deaths lowers life’s perceived value. The covid-19 deaths have become a statistic within a curve that we want flattened. In the US, The New York Times tried to prevent reducing people to numbers by dedicating a front page to the first 100,000 deaths and listing memories gathered from obituaries.
I have answered how much life insurance to buy in different ways. The most rational is to project future expenses and revenue, if you die. Life insurance should fill the gap. Few follow this approach because it is elaborate and unemotional. I have sometimes suggested a thumb rule to buy sum assured that is 10 times one’s annual income. This is easier to understand because it is built on the concept that, should you die prematurely, insurance will cover 10 years’ income. This should allow the family time to find its financial feet. The challenge in this approach is that the sum assured turns out high and most are not willing to buy that much insurance. I encourage people to buy what they can and begin an insurance instead of being paralyzed into inaction.
The most effective purchases, however, are when the insurance amount is linked to a specific objective. This is an emotional appeal but with facts. Some of the words people use when buying insurance are “I would like my daughter to study in Oxford (or another Ivy League for that matter)", “I would like to leave a gift for my husband", or “I would like my family to own a house". These aspirations have a value and I jump at the opportunity to specify that amount as the sum assured in term life. The Oxford education costs over a ₹1 crore, a home between ₹4 crore and ₹10 crore in upscale metros, a meaningful gift again costs is ₹1 crore-2 crore. The aspiration, cited often, that makes me uncomfortable is marriage expenses for a daughter, often with the benefit timed to the child turning 18. I wish the industry would not market this. When I was working at Unilever over two decades ago, the possibility of Fair and Lovely dropping references to fairness, whiteness and light skin, was unthinkable. But this has now happened. Insurers can take a cue and encourage a broader perspective.
Another shift is in health insurance’s sum insured. Historically, the estimates we used were up to ₹10 lakh for cardiac care in a good city hospital and ₹10 lakh-15 lakh for cancer treatment. So, a sum insured of ₹10 lakh-20 lakh was safe territory. Covid-19 has changed the equation. The treatment costs have crossed ₹10 lakh in many private hospitals, and even non-covid-19 disease treatment costs have increased substantially. Hospital capacity is under pressure; hygiene and treatment protocols are escalating costs. In these conditions, a sum insured of ₹20 lakh-30 lakh rather than ₹10 lakh-20 lakh is needed in the metros, particularly for families. I prefer policies that are wider in their scope of cover. Specific disease insurance covers are useful after you have the basic insurance plan in place. First, increase your mediclaim sum insured to the right level, then buy more specialized policies.
Finally, your home. There is a scare in Delhi and Gurugram about an imminent earthquake. Many residents of high rises in Gurugram have called for earthquake insurance. This forms part of the standard home insurance package but the sum insured is important. Home insurance policies, typically, pay for repair costs after the repair is done. However, in high rises, the damage in another apartment may make your apartment unliveable or disputes between the builder, homeowners and service providers may delay reinstatement. In such situations you should be able to buy a new home and the sum insured should cover that cost. This means you need to have a home insurance that pays not just for repair but also for the land cost inherent in an apartment’s price.
The sum assured decision is not a once done and finished decision. Ever so often, but certainly on renewal, you should see what you have bought and whether the coverages need to be increased.
Kapil Mehta is co-founder, SecureNow