While constructing an investment portfolio, you target each of your financial goals. For instance, for retiring, you work out a target retirement nest and arrive at monthly investments to hit the target. Similarly, other financial goals such as children ‘s education, are worked out.
However, such financial planning assumes a constant stream of income for the family to make such investments. What if the unexpected happens? It could not only throw family finances off but also jeopardize the financial goals under consideration. How do we financially safeguard our family from a mishap or an unfortunate event?
That’s where the insurance comes in handy – working more like a dormant emergency fund. While there are many types of insurance, financial experts categorize the following four as the essentials:
1. Term life cover
The death of a sole earning member of a family at an early age disrupts income streams. That’s where ownership of a term life cover could come in handy. It is a pure life cover and the cheapest of all. A 40-year old taking a life cover of Rs 1 crore pays Rs 27,000 annually. In case of death of the insured, a sum assured of Rs 1 crore is paid to his family.
How much cover does a family need? Some take a cover that’s 10-12 times one’s annual income, while others are happy hitting a seven-digit figure (Rs 1 crore). But income keeps changing over a period of time while a seven-digit figure of sum assured doesn’t last long practically. So, essentially you should consider the expected income loss from the death of an earning member.
2. Medical cover
An unexpected medical expense can also affect family finances. A major surgery costs about Rs 4-5 lakh. Angioplasty or bypass surgery can set you back at least by about Rs 2-4 lakh, while a kidney transplant costs at least Rs 4 lakh.
Medical insurance kicks in whenever there is hospitalization or related expenses to be borne by a family member. These expenses are either reimbursed or paid directly to the network hospitals by the insurer.
A base health cover with a sum assured of Rs 10 lakh is adequate for a young family to begin with. However, you need to top it up regularly, as medical costs escalate.
3. Critical illnesses and Accident cover
Treatment for critical illness like cancer costs even more – upwards of Rs 10 lakh. When one gets a comprehensive health insurance policy for the family including that for critical illnesses, it essentially outsources such large expenses in case of hospitalization to the insurer and they don’t have to bear them or plan for them. This in turn frees up savings which can be ploughed into long term investments.
Similarly, an accident cover indemnifies you in case of accidents, injuries, temporary and permanent disabilities. You can have them as riders on your life cover by paying an extra premium.
Think of the above insurances as a dormant emergency fund that comes to your rescue in case of contingencies. It frees up your savings for making long term investments and in achieving various financial goals with the least disruption.