Life insurance plans and health insurance are crucial safety nets in today’s uncertain world. However, simply having a policy isn’t enough. Choosing the right coverage amount is paramount to ensure adequate financial protection for yourself and your loved ones. This article will guide you through the process of determining the appropriate sum assured for your life insurance plans and the ideal sum insured for your health insurance, ensuring you have the right level of coverage for your specific needs and circumstances.
What should be the Right sum assured for your Life insurance plan?
If you have financial obligations or dependents who depend on your income, you definitely need a life insurance plan. The next step after deciding to buy a life insurance policy is to figure out how much insurance coverage (also known as the sum assured) you and your dependents will need in your absence.
Therefore, a more systematic method for determining the right insurance coverage or sum assured is shown in the following step-by-step guide:
Step 1: Start by calculating the future earning years: Think about how many years you anticipate earning in the future. The years of income that the sum assured from the life insurance policy will replace is going to affect the suitable sum assured For example, if you are currently 30 and want to retire at 58, your future earning years will be 28, which affects the necessary sum assured you should choose.
Step 2: List all of the yearly expenses in a chart: Identifying your likely recurring expenses is the goal here. Include all recurring and ongoing expenses, including rent, tuition, essential services, food, fuel, medical bills, and other occasional (discretionary) expenses related to entertainment and hobbies. Even though inflation causes these expenses to increase annually, your insurance coverage should be able to cover them year over year. As a result, a) map the annual recurring expenses, taking into account anticipated inflation, and b) determine the present value of the same by discounting them using current interest rates, such as FD rates.
Step 3: Take into account significant life stage goals and changes: List the significant life events that may require a sizable lump sum payment for your family. These include retirement, overseas travel, weddings, and the cost of higher education. If you have already saved for the same via your regular investment, add the expected recurring savings to the cash flows charted out in Step 2. Make sure you factor in the expected savings to reach your goals, which might exceed your present savings.
Step 4: Subtract investments and savings from all liabilities: Combine all of your debts, including home, auto, and personal loans, and then add the total to the present value determined in Step 2 and adjust for the life stage aim in Step 3. Deduct any current life insurance coverage (the guaranteed death benefits of your life insurance plans. Additionally, deduct from this amount the value of your investment portfolio. The sum assured that you choose when purchasing a life insurance (term) plan should be the final amount that you arrive at by the end of this method.
In India, how much health insurance is sufficient?
You must choose a coverage amount that is at least half of your yearly income if you wish to purchase a health insurance plan for yourself. For example, you must choose health insurance coverage of at least 5 lakh if your yearly income is 10 lakh.
But in the past few years, the cost of healthcare has skyrocketed. Even if a lower health insurance plan is equal to 50% of your pay in this case, it might not be sufficient. In order to comfortably cover their medical expenses, insurance experts advise people to choose a minimum health insurance coverage of 5 lakh.
Factors to Consider While Choosing the Right Health Insurance Coverage Amount
Age of the Insured: When determining the amount of medical insurance coverage, your age should be taken into account. The amount of the sum insured should increase with your age. This is important because, as you age, you are more likely to get sick and develop health issues thereby, requiring a higher sum insured than a man in his twenties.
Medical History: When determining the sum insured for the health policy, your medical history and any pre-existing conditions are taken into account. This is due to the fact that having a pre-existing condition increases the likelihood that you will file claims frequently. Therefore, if you have a pre-existing condition, you should choose a higher coverage amount.
City of Residence: When choosing the sum insured for your policy, the city in which you currently reside will be taken into account. Compared to tier-2 and tier-3 cities, the cost of healthcare facilities is higher in tier-1 cities like Delhi and Mumbai. Therefore, you should choose a higher sum insured if you live in a tier-1 city as opposed to someone who lives in a tier-2 or tier-3 city.
Type of Policy: When choosing the amount of coverage for your health insurance plan, you should consider the type of medical insurance policy you intend to purchase. You can choose a lower sum insured if you are purchasing the policy solely for yourself. However, you must choose a higher coverage amount if you are purchasing insurance for your whole family.
Lifestyle Habits: When choosing a sum insured for your health policy, you should also consider your lifestyle habits. Obesity, diabetes, hypertension, and other lifestyle diseases are highly likely to develop if you engage in unhealthy habits like binge drinking, smoking, eating junk food, and not exercising. Therefore, you should purchase a health policy that can pay for the treatment of these lifestyle diseases and has a high sum insured.
Ability to Afford: When deciding on the coverage amount, you should consider both your income and your financial capacity for a health insurance plan. You must choose a lower sum insured if your income is low and you are unable to pay expensive premiums. As an alternative, you can purchase a health insurance plan for 1 crore if you are able to pay high premiums and want comprehensive coverage.
In the end,
Carefully considering factors such as your age, income, family size, lifestyle, medical history, city of residence, and financial capacity is crucial when determining the appropriate sum assured for your life insurance plans and the sum insured for your health insurance. By diligently assessing these factors and following a systematic approach, you can ensure that your insurance coverage provides adequate financial protection against unforeseen events, giving you and your loved ones peace of mind and financial security.
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