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Insurance Planning Essentials – How much Insurance cover you should have?


Few days ago I’ve posted a short article titled “Lifeand Health Insurance – The Right Way to Look At”. You may also relate this to the post “Use,Abuse and Misuse of  Life Insurance”
This one may be considered a continuation and slight detailing about Life Insurance, with extension to Personal Accident Insurance.

With the above articles you know, you should buy Term Life Insurance. While buying the term insurance most policies offer riders. Riders are ‘Add-ons’ that can be bought along with base cover. Riders offered may differ one to other insurer and plan. Most common are ‘Accidental Death Benefit’, ‘Accidental Disability’ and ‘Critical Illness’.

Before I elaborate on the riders, let me describe amount the optimum cover for base life cover. There are methods of calculating the exact amount of Life Cover you need – The Income Replacement Method and Human Life Value (HLV). These methods may be a bit complicated for layman. For simplicity, you may use thumb-rule method. For age 18-30 one may buy 20-25 times of his / her annual income; if aged between 31-40, you may buy 15-20 times of your annual income and for ages above 40, you may buy 10-15 times; If you find this also confusing, them simply buy 10 times at least.

Now, coming back to riders, Out of riders offered I believe the most useless one is Accidental Death Benefit or ‘Double Death Benefit for Accidental Death’. This rider pays double the base life cover, if the cause of death is accident. A person’s life’s worth can’t vary based on reason for death! So, if your Human Life Value is, say 2 Crore, then it can’t be 4 Crore if death occurs in an accident. Other way round it is inappropriate to buy 1 Crore cover, because total cover would be 2 Crore including Accidental Death Rider. How can one be sure of reason of death. So, if you should take 2 Crore Life Cover as per calculation, then let your base cover be full 2 Crore and don’t take Accidental Death rider. However, the Accidental Disability Rider is useful one and so is Critical Illness Rider.
However, the riders cover little in line with little that they cost. It is advisable to buy separate, comprehensive & stand alone Accidental Insurance and Critical Illness Insurance, than going for a rider cover with term insurance.

A plain Term Insurance alone without any riders doesn’t give you All Round Insurance Cover that you need. A Term Insurance addresses only one problem – untimely death. What if person meets with an accident and survives with disability? In fact, financially this situation is worse than the death itself, because then the family has to take care of a disable person (which are normally more than a normal person) and there is No income and No claim is payable by Term Insurance (as the death has not happened). Same is the situation if the person is critically ill. A well rounded Insurance covers against untimely death (Term Insurance), Accidental Disability (Personal Accident Insurance), Illness (Health Insurance and Critical Illness Insurance). Now the riders that come along with term insurance for Accidental Disability and  Critical Illness address the problem for the name sake. For example most Accidental Disability riders currently in the market cover only ‘Permanent Total Disability’, which mean the claim is payable only of the person is Permanently & Totally (loss of both limbs or both eyes) disabled. It won’t pay for Partial Disability or Temporary Disability. Whereas, a comprehensive stand alone Accident Insurance covers. Same is the case with Critical Illness Rider.

Then next question is, how much should be the cover for Accidental Disability and Critical Illness? For the Disability is should be equal to the Term Life Cover’s Sum Assured. Critical Illness cover depends on your healthcare / treatment preferences and risks based on family health history; in any case it should be minimum 25 Lakhs. Critical Illness cover is apart from (in addition to) a normal Health Insurance (Mediclaim / Hospitalization) Insurance you have / should have.


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