In my last blog I had requested you to put together a summary of your current investments. The broad summary was under the headings Physical Assets (Gold & Real Estate), Protection, Fixed Income and Equity.

Let us start with Protection. You must be wondering why start with Protection? Well, the answer is simple – the idea of investing is to gain financial independence eventually. What if something goes wrong before your investment efforts have borne fruit? Hence in the investment hierarchy you start with Protection first.

How much Life Insurance or health insurance is good for you?

There are no right or wrong answers. You must feel comfortable with what you have in terms of protection. Typically Life Insurance companies suggest that you compute a Human Life Value (HLV) – simply put HLV is equivalent to the current value of the total income that you can potentially earn in your lifetime. It is wonderful if you can do that. If you cannot here is another rule that you may find useful. Your intention while buying insurance is to ensure that your dependents or loved ones get enough to tide over the  loss in terms of its financial impact. From a financial perspective the family needs to meet their monthly expenditures. Some money may be required to re-train some person in the family who could be the next potential bread earner and also there could be some outstanding loans that need to be repaid. If you can buy insurance that is equal to 36 months of your expenditure + some money to re-train your dependents + outstanding loans – this should be generally enough to tide over the immediate crisis.

Here is a quick maths based on the above method:

Monthly expenses: Rs 100,000 – Life cover requirements – Rs 36 Lacs

Cost of Re-training: Rs 3 lacs

Outstanding Loan: Rs 50 lacs

Total Insurance Requirement: Rs 89 lacs

This is the least that I would recommend. You can adjust these numbers for taxes or you may want the money received from Life Insurance to last a lifetime for your loved ones…. you can always go for as much as you can afford. The above indicated amount is just a start.

Is Insurance expensive? How much would need to pay every year to get a cover of Rs 1 Crore? The cheapest insurance policies ask you to pay a periodic premium and would only pay back on Death. There is no investment component in it. Today Term Policies cost around Rs 10,000 to Rs 15,000 per annum or even lesser for a cover of Rs 1 Crore. Yes for less than Rs 1,000 per month you can rest assured that there is decent protection for your family even if you are not around. I would recommend that you buy a Term Plan for the longest term possible basis your affordability.

Health Insurance: A lot of people who have bought health insurance may not be even aware of what exactly are the benefits that they are entitled for.

Health insurance typically covers costs related to hospitalisation. You need to be admitted for a minimum of 24 hrs  to avail of health insurance benefits. In other words most health insurance policies do not cover your day to day medical expenses. A hospital typically charges you basis the room that you are admitted. The cheapest could be getting admitted to a common ward while the most expensive could be a private suite. Interestingly the charges related to pathology, treatment, radiology etc, are lined to the room you are admitted in. If the charge of the doctor for visiting you is Rs 1,000 in the common ward it would very well be three times in case you were treated in a private suite. Many of us learn about this only when you actually use the health insurance.

While buying health insurance, you need to be very sure of the following four things:

a. What exactly is covered in your health policy?

b. What would get reimbursed while you are treated in a hospital?

c. Which hospitals can you get admitted to for availing a cash less facility?

d. What is the procedure that you need to adopt for availing of a cash less facility. A cash less facility typically implies that the health insurance company would directly settle the expenses with the hospital.

How much health insurance should be buy? I do not have any specific advice on this but all I can say is that get some minimum cover for the entire family. Even if you do not get full reimbursement you would have ensured that some percentage of the overall cost has got covered. More importantly, buy health insurance early in life so that your yearly premiums remain low and your health insurance is able to cover the broadest range of illnesses that you might suffer in future.

A minimum of Rs 500,000 per head would be the least to start with. Do keep in mind that you would typically use health insurance much later in time then when you first bought a health insurance and with inflation Rs 500,000 that you started with will be much less than what you need in future.

It may not be a bad idea to self finance some of your medical expenses. All you need is to invest an equal amount to your health premium in some kind of investment (we will be discussing the various kinds of investments later) that will grow over time and hence take care of the inflation in costs that are inevitable.

Health insurance costs would depend largely on the number of members in your family, their age and current health condition. Depending on what you can spare, you should buy the Health insurance policy accordingly.

While you buy any kind of insurance, it is important that the policy is in force when the need arises and this only can happen if you have paid your insurance premium in a timely manner.

The great news on buying insurance is that (a) it is cheap if you buy the correct product and (b) you can save on taxes as well.

I will be covering pension plans much later.

Now that we have some protection in place, we can move to the other components of your investments viz. Fixed Income or Equity. I shall do so in my next post.