The first thing you should put your money in

If you thought I’m going to talk about a Mutual Fund, I’m sorry to disappoint you. This isn’t about investment. It’s about a hygiene factor, an essential MUST-HAVE product.

I’m talking about insurance.

The two MUST-HAVE products in your portfolio are:

1. Health Insurance or Mediclaim

2. Term Insurance

This may be a slightly long post to read, but I promise you, after this, you’ll have a clear idea on insurance products. And it won’t be just about what these products do, I’ll also tell you how much premium you should pay and what should be your cover.

Let’s start with Mediclaim. We all know what a mediclaim or health insurance is. You pay a fixed amount every year (called premium) and you get a cover if, God forbid, you are hospitalized in future. This means that the insurance company pays for your hospitalization expenses up to a certain limit (known as “cover” or “sum insured”).

However, what most people don’t know is how much health insurance cover we should have. So here it is - it actually depends on a lot of factors such as where you stay, how healthy you are, whether you have any health conditions etc. But typically, if you’re staying in a metro city, a health cover of approximately Rs. 15-20 lakhs should suffice, provided you don’t have pre-existing health conditions or risks of health complications. If you stay in a non-metro town, you can have a cover of about Rs. 5-10 lakhs. However, it is better to have a 20 lakh cover here too, since a lot of people come to metro cities for treatment in case of a major health issue. However, medical expenses keep increasing due to inflation (if you don’t know what inflation is, read about it in another post I wrote here), so you may need to increase your cover if costs increase proportionately after 5-7 years. Just keep revisiting healthcare costs every 3-5 years, and you’ll get an idea.

It is extremely important to read the terms and conditions of the insurance policy before purchasing it, because there are various clauses which have finer details about claim settlement. For example, some policies only reimburse up to Rs. 2,000 per day towards bed/room charges. So if your hospital charges Rs. 5,000 per day, you may have to shell out the additional Rs. 3,000 from your own pocket. I will share a separate post on Health Insurance later. This post is about how much money you should put towards insurance policies.

A health insurance policy should be taken as early as possible so that you pay lower premium. Yes, the premium (amount you pay every year for the policy) increases with increasing age of the individual. To give you an approximate, a 15-20 lakh policy for a 30 year old may have a premium of anywhere in the range of Rs. 10,000 to Rs. 20,000, whereas for a 50-year old, this will be double. This number will also change depending on the insurance company, the benefits they provide, whether you have any pre-existing conditions or not and a lot of other factors. But this is a ballpark figure.

So whenever you think of investing money, first ask yourself if you have the required insurance cover in case something goes wrong with your health. Only if you have a decent cover, should you then put money in investment products. DO NOT buy mutual funds or fixed deposits or anything else before you have a health insurance and term insurance policy!

Let’s talk about Term Insurance now. The first place where people get this wrong is that they compare term insurance to other policies (such as ULIP and Endowment plans) which will give some returns on maturity and a lumpsum amount in case of death.

It is not.

It’s an umbrella for a rainy day. A term insurance will protect your family in case, God forbid, something happens to you and you die. It is meant to give a financial cushion to your loved ones and dependents after your death. If you make it alive till the policy expires (which is generally 70-80 years of age), you will not get anything after that. (And all of us should aim that we never get the benefits of our term insurance ;) )

Now the question arises - what should be the the cover amount that you should buy term insurance for? Most people pick up a number like 50 lakhs or 1 crore. However, this is as good as anybody’s guess.

To be more realistic, this depends on how old you are, how many dependents you have, your lifestyle and current expenses and how old your children are (if you have any). There’s a way to calculate it.

As an example let’s take the case of Rahul, a 35-year old guy who has a 3-year old kid. He earns a salary of Rs. 10 lakhs per annum and his expenses are 50,000 a month, which means Rs. 6 lakhs per annum. Now, here’s how he would calculate the term insurance cover required:

1. As a rule of thumb, the bare minimum cover for living expenses should be around 10-12 times your annual income or 15-20 times your annual expenses. Assuming 10 times income, this would mean Rs. 1 crore for Rahul

2. Then, Rahul would need to factor in other costs like children’s education for 16-20 years, depending on how educated he wants his kid to be, and whether he wants to fund his kid’s higher education or not. Assuming 20 years of education @ 1.5 lakhs per year, this comes to Rs. 30 lakhs. Another major cost would be his kid’s marriage, which, 30 years later could come up to around 40 lakhs. Please note that this also is subjective, and you need to calculate all of this considering how marriages in your community are, and how you would want your kid’s marriage to be, 25-30 years later. The cost for these additional expenses for Rahul, totally comes to Rs. 70 lakhs

3. Now, here’s the part which most of us miss. If we have any kind of loan on our heads, the amount which is still left to be paid, needs to be added to the above amount that we have calculated. So, for example, if Rahul has a home loan outstanding of Rs. 1 crore, out of which he has paid Rs. 20 lakhs, he needs to factor in Rs. 80 lakhs for his insurance cover. This is absolutely essential, because in case something happens to Rahul, his wife/kids should not be the ones running from pillar to post trying to repay his debts.

Now, factoring in all the above costs, Rahul would need a term insurance cover as below:

As we can see, the term insurance cover required for Rahul would be Rs. 2.5 crores. We don’t really factor in all of this when we buy a term insurance, and that’s where we get it wrong.

Again, the calculation above is subjective and varies from person to person. As an individual, you may have two kids, or a set of parents to look after, or some more debts to repay, or more expenses compared to what I mentioned earlier. You may have an earning spouse, no kids and no parents, and therefore no dependents, in which case you will need a much lower, or no term insurance cover at all. All that is for you to calculate. You need to look 30 years ahead and gauge the expenses you may have; and then calculate the insurance cover required.

Remember, a higher cover does mean a higher premium, but the difference in premium would only be a couple thousand rupees. And the kind of peace this few thousand rupees would give you is priceless. So always be liberal in allotting these amounts while calculating.

As a ballpark figure, a term cover of Rs. 1 crore would cost around Rs. 10,000-12,000 per annum and a cover of Rs 2 crore would cost around Rs. 20,000. This varies from company to company, but like I said, that’s a ballpark. The difference in premium is just Rs. 8,000 a year, but with regards to the cover, the difference is between giving your child a great education v/s not being able to afford a higher education for the kid. Hence, be liberal.

So well, there you go! The first thing you should put your money in, before you invest anywhere, is insurance - both term and health.

If you thought you could invest your money in stocks and mutual funds after this, I’m sorry to disappoint you. The next thing you must have, is not a Fixed Deposit or Mutual Fund or anything else, but an emergency fund. But that is for another day, and another post.

Until then, if you were able to make it to the end of this long post, thanks for reading! Let me know in comments if you have any queries.

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