LoanRaja Blog- Personal Finance Guide

Our financial needs change throughout our life. As the life style changes needs too undergo transformation. In accordance with the changing financial needs life insurance needs also change. The life insurance requirements of an unmarried 25-year-old will be entirely different from that of a married man with children. A 60-year-old’s insurance needs will be totally different. A plethora of life insurance policies are available now to suit the needs of different age groups. Lifecycle based portfolio strategy takes into consideration the dynamics of different life stages of an individual. Its investment approach changes with each life stage.

Such a policy provides you with an option of lifecycle-based portfolio strategy that continuously re-distributes your money across various asset classes. This will be done based on your age, and helps you achieve the right asset allocation to meet your desired financial goals. In the beginning, your investments will be distributed normally between two funds. As you move from one age band to other, the fund will redistribute your investments. This will take into account the ability to take risk at different ages. Earlier years will see more allocation for equity and less for debt. In later years the trend will reverse.

Before marriage

In the case of a young man of 25 who has just started earning, the thought of investment may be the last thing to figure in his mind. He may be single and getting support from the family. He is ambitious and focused on his career. Mostly he likes to spend. Perhaps he is thinking of going for higher studies. At that stage of life what kind of life insurance suits him best? His life insurance needs are almost negligible. The main objective for insurance should be to promote a habit of saving. For this the best option is to buy an equity linked insurance scheme which doubles as an investment tool. He can also try a shorter-term endowment assurance policy.

After marriage

After marriage one’s lifestyle gets reoriented and financial needs undergo a sea change. Young couples dream big. A better car, owning their own home, a foreign holiday…. the list is endless. It is also the time to think about your added responsibilities. You now have a partner; you may be buying a house and perhaps planning for a family. It is time for you to start focusing on your family and yourself. At this stage what can be the insurance solution? You can opt for a home protection plan to take care of your home loan if the inevitable happens. A personal injury insurance plan to provide for the medical needs will be an added advantage.

The birth of a child ushers in far more changes in a couple’s life. Along with the joy the newborn brings on new responsibilities. This is the time a family will seriously plan for the future. What kind of protection plans will serve your needs at this stage of your life? Parents would like to provide the best for their children. They deserve a secure future and a whole lot more. You also need to adequately protect your assets, so that your family is provided for even if something unfortunate should happen to you. A home loan protection plan will ensure that your family is not burdened by the home loan even if you are not around.

It is also important that you plan in advance to meet your child’s future financial needs. Insurance firms offer several child-related investment avenues for parents wherein the money is invested in endowment plans and in unit linked plans. Planning financial resources for your child at various life stages like education, marriage etc. are fulfilled by Money Back Child Insurance Plans. Parents can also invest in unit-linked Children Insurance Plans where there are better returns. This has more flexibility in terms of switching one’s money from equity to debt and also can withdraw money several times in a year.

After retirement

At the other end is the 60-year-old retired man. He has no regular jobs or steady income. His children are financially independent. He has no financial liabilities. He needs regular income to lead a decent life. Moreover, he will need sufficient cash balance for any emergency medical expenditure for him and spouse. At this age he has to manage with his savings and investments. He is not in a position to take risks. His basic concern will be the protection for his investment and also protection for his spouse. Such a senior citizen can select single premium immediate annuities or long-term care products or a retirement plan, which protects capital and gives steady income.

After deciding to go in for a life insurance policy one has to make up his/her mind how much life insurance he/she needs. Ideally the sum assured should provide for all the needs of your family like children’s education and marriage while meeting the daily basic expenses when the insured person is no more. It may not be an easy decision to make. Firstly, your income level has to permit you to opt for the policy that you want to take. Your need may be more than the disposable income you can spare for paying premiums. Even if you want a higher sum assured the insurer need not oblige you citing your present income.

There are many factors that are relevant in determining the amount of life cover you should buy. One way of doing it is to calculate the level of income a family needs to maintain its standard of living when the breadwinner is not around. Suppose a family’s present need is Rs 30,000 p.m. The extent of life insurance for its earning members should be such that interest income from the sum assured can meet the family’s monthly expenses of Rs 30,000. To compensate for the fall in value of the rupee one needs to take policies for higher amount.

Changing need

Life insurance needs change through different stages of life. Young people with no dependants may not have much need for life insurance. As one’s family responsibility grows, life insurance needs too increase. When one is single he may not bother much about life insurance. However, at middle age a person having children will feel the need to have more life insurance as the need to give good education to children and marriage expenses will dog him. Thus, a periodic review based on your family circumstances is required in order to ensure that the coverage is adequate. A person employed in some hazardous profession will need more life insurance cover than an ordinary individual.

Basically, the amount of insurance one should buy is dependent on his/her economic value, which is also called human life value. This varies from person to person. Human life value is the capitalized value of the net earning of an individual for the rest of his working life. It is the present value of the total income of the individual, which is lost to the family in the event of his untimely death. Imagine a 25-year-old person earns a gross income of Rs 3 lakh per annum. He is due to retire at 60. If he passes away now his family will be losing Rs.1.05 cr., his future income. The human life value of the person is Rs.1.05 cr.

Age factor

Your age is a crucial factor in deciding the quantum of insurance that you can afford. The rates of premium go up, as you grow older. One can buy more insurance for the same premium at a younger age than at an older age. The need for protection may be quite high, but the present need for disposable income may not permit buying adequate insurance. Premium payment means a regular outflow of disposable income. Not many would like to buy more insurance as it will overstretch the resources. You can then think about buying extra insurance as and when you can afford it.

Some experts say that 8-10 times your annual income will be a good sum to insure. If a person’s annual income is Rs.3 lakh he can take a life insurance policy in the range of Rs.24 lakh to Rs 30 lakh. Another approach is to assess the percentage of income you can spare for paying premium. This can help you to decide on the quantum of life insurance. If you expect to spend a particular amount for the education or wedding of your children, you may like to buy an insurance policy for a specific sum to meet such a need.

One must always remember that life insurance is primarily a protection and is no substitute for investment as returns are negligible. Considering the depletion of value of the rupee due to inflation the actual return at the time of maturity of an insurance policy may well be in the negative. Of course one needs adequate life insurance to safeguard the financial needs of the family members if the unforeseen happens. But it won’t be wise to over-invest. If your family is wealthy you need only a smaller amount of insurance. If the family members are earning independently you can reduce your insurance.

The rising cost of medical care is becoming a big problem in urban India today. Treatment for a serious illness in a private corporate hospital can wipe out your entire life’s earnings at one go. Everybody definitely needs health insurance coverage to avert such a situation. In India awareness on health insurance is very low. Even well employed persons some times ignore the need for health insurance. A health insurance policy not only covers expenses incurred during hospitalization but also before and after hospitalization. This may include money spent for conducting medical tests and buying medicines. The cover is to the extent of the sum insured.

Health insurance is insurance that pays for all or part of a person’s health care bills. Group health plans, individual plans, workers’ compensation etc are among the health insurance plans prevalent. So long as you pay your premium regularly the insurance company will take care of your medical expenses. Cover extends to pre-hospitalisation and post-hospitalisation for periods of 30 days and 60 days respectively. Domiciliary hospitalisation is also covered. It is crucial for you to read the fine print before taking any health insurance policy. Various clauses relating to pre-existing illness and claims have to be thoroughly looked into to avoid disappointment later.

Reimbursement & cash plan

Broadly there are two types of health insurance contracts. The common one is reimbursement of medical expenses or hospitalisation charges subject to a prescribed ceiling. The second is the cash plan. This plan provides for payment of a fixed amount per day for hospitalisation. In such cases, the amount received by the insured may not be enough to meet the actual expenses always. Only the first type is a real health insurance contract. The health insurance contracts marketed by general insurance companies suffer from one serious drawback. The contracts are renewable every year and the insurer has the right to refuse renewal.

Benefits

Considering the mounting cost of doctors’ fees, medicine and hospitalization charges by taking a health insurance policy a person can safeguard himself and his family from the burden of high cost of treatment. In case of a sudden illness or accident, the health insurance policy takes care of the hospitalization, medical and other costs incurred. If you start young the premiums will be lower. It reimburses the medical expenses. Discount on insurance premium is available on family package. The premium paid up to a maximum of Rs.15,000 is exempt from income tax. A patient can be treated at home when he is not in a condition to be moved to the hospital.

Coverage

Based on the coverage offered, health insurance plans can be divided into the following categories:

Hospitalization Plans: These plans cover your expenses in case you need to be hospitalized. Within this category companies offer different payout structures and limits for various heads of expenditure. The hospitalisation coverage can be reimbursement based plans or fixed benefit plans. These plans aim to cover the more frequent medical expenses. Now health insurance companies offer many innovative policies and schemes. ‘Cashless hospitalisation’ is one such product. Under this plan, individuals insured do not have to pay for their hospital bills in case of hospitalisation; the insurance company settles the bill directly. But, certain terms and conditions have to be met. The hospital needs to have a tie-up with the insurance company.

Critical iIllness plans: These health insurance plans provide you coverage against critical illnesses such as heart attack, organ transplants, stroke, and kidney failure among others. These plans aim to cover infrequent and high cost medical expenses.

Specific conditions coverage: These plans are designed specifically to offer health insurance against certain complications due to diabetes or cancer. They may also include features such as disease management programmes, which are specific to the condition covered.

Costs of medical insurance policies vary from company to company. Insurance firms have introduced more innovative policies with riders that cost more. Here is a typical health insurance policy. Parivar mediclaim of National Insurance is a family floater health insurance policy wherein entire family will be covered under single sum insured. The eligibility is from 3 months till the age of 60. The policy covers reimbursement of hospitalization expenses for illness contracted or injury sustained by the insured person not exceeding the sum assured. The sum assured can be from Rs.2 lakh to Rs.5 lakh in multiples of 50,000.

For a Rs.2-lakh policy till the age of 35 the annual premium will be Rs.2469. An additional 25 percent will be charged for spouse and 20 percent each for two children. For 46-50 years the corresponding figures will be Rs.4290 plus 35 percent extra for spouse and 20 percent each for two children. For Varistha Mediclaim for senior citizens the ceiling of sum assured is 1 lakh. The annual premium costs Rs. 4180 for 60-65 age group. For critical illness benefit the sum assured is Rs.2 lakh. Annual premium for the same age group is Rs. 2007.