How to choose the right insurance cover

Insurance plans are meant to manage the life contingency risk first before extending their reach to cater to other life goals. A lot of financial goals of a household can be adequately covered by way of insurance plans.

At the very basic level the sum assured should cover the normal lifelong expenses of the surviving family members. Once a basic cover is in place, other important financial goals such as education and marriage of children and retirement corpus should be gradually invested into through appropriate investment plans, e.g. mutual funds, direct equity, suitable insurance policies, annuity plans, etc.

The requirement of insurance differs at various life stages. A matching of insurance and investment can be done at various life stages. While insurance should cover the life contingency risk fully, the investments through either mutual funds or suitable insurance plans should catch up to the goals.

This is possible by way of taking a critical review of insurance covering the family's future expense needs, financial liabilities and the extent of goals achievable during initial years of a particular life stage.

The investments should be initiated for the financial goals slated during the life stage. The insurance should be incremented at every 3 to 4 years in suitable blocks by way of term plans and investment cum insurance policies by critically evaluating costs incurred on them. At the beginning of life stage, systematic investment plans should be initiated to accumulate for specific goals outlined for that stage.

The table below illustrates a possible framework to achieving life goals while adequately covering risk to life.

The life insurance cover required here is presumed to replace the future life expenses of the survivors in addition to covering financial liabilities towards goals not met by investments accumulated. As the life goals are added or met the required insurance cover is reviewed by taking into account accumulated corpus of investment goals and retirement corpus. In the life stage 50 to 60 years, the retirement corpus accumulation is on accelerator. Therefore, gradually the insurance cover needs to be reduced and a basic cover should be retained until retirement.

The investment plans chosen should be well diversified in the areas of mutual funds, direct equity, unit linked insurance, bonds, fixed deposits, etc.

The central theme is to buy and retain insurance cover which manages the risks posed by the particular life stage and the goals to be met. One important area to be looked into is to have suitable riders such as disability insurance and critical disease insurance along with life insurance.

An additional accident insurance may be added if situation specifically demands. Adequate medical insurance for the entire family is necessary in view of increasing medical costs, especially hospitalisation. This is necessary so as to avoid liquidating long-term financial assets accumulated to achieve specific goals in case of hospitalisation needs.

It is advised to integrate insurance needs in a well-crafted financial plan as suggested in the table above. Certified Financial Planners or CFP professionals are well qualified to quantify financial goals and advise appropriate insurance and investment strategies to achieve the same.

The writer is working with Financial Planning Standards Board India (FPSB India) as the Vice Chairman and Chief Executive Officer. The views expressed here are personal, and do not necessarily represent that of the organization. FPSB India is the sole marks licensing authority for the CFP marks in India, through agreement with US-based FPSB Ltd.