Part Two - Defensive Setup

Now that we want to park the money into a more flexible instrument, we can proceed to next options. You focus on what can go wrong and take care of it first.

Part 2A is Health Insurance.

Take a decent amount of health insurance (more correctly called Sickness Insurance, since what it means is that when you get sick and get admitted in a hospital, then you get part or all of the medical expenditure you did).

To shortlist the options, I checked with the following options:

  1. Amount – 5L

  2. Age – I put in 30 years for husband and wife, just to have an idea.

  3. No room rent limit (many policies have sublimits like 1% of cover for daily room, etc. This means for a 5L policy, the daily limit for room would be 5000 a day. Anything above will not be paid to you back). So avoid such sublimits. More about this in the comment in this old writeup.

  4. No copay. This means you will have to pay part of the whole bill. Avoid.

  5. No Maternity benefits. Even if you are planning to have kid, avoid plans with such benefits because they are much more expensive and it is better to pay such expenses from the pocket rather than get them reimbursed.

  6. No restore / refill benefits. Please ignore.

  7. Pre-existing disease coverage – this is not important. For young people, this option is not important.

  8. Ignore options like Day-care treatment, Home care, Annual checkups, Ambulance expenses, Dental treatment, Spectacle care (I mean these are a thing nowadays!).

For more research, please check into some of the resources mentioned in [Freefincal's Free Resources Page]( Do read the policy documents for the exclusions and also the list of hospitals in your area. And buy it ASAP (max 3 days research, or 1 weekend).

Part 2B is Life Insurance

What is life insurance? Basically this is an income replacement insurance and not a “life” insurance. The life of a person is invaluable and cannot be replaced by money. What we want is to have a lumpsum amount of money when the bread-winner dies, which can substitute for the income lost due to his absence.

Sidenote: Yes, in today’s world, both husband and wife earn and are equal/unequal bread-winners. But because of socially accepted more responsibilities of the wife, I do feel that husband should have higher coverage than wife’s. The importance of the wife in the family is so high that she cannot be replaced while I expect the husband to be more financially savvy, so if the wife dies, the husband can manage without that lumpsum due to life insurance of the wife. But if you want, have coverages for both husband and wife.

Buy pure term insurance. In simple words, this plan/policy means that the company will pay you an amount X (called Cover amount), if the policy holder dies within a defined term (10-40 years), and for that it will ask you to pay the insurance amount (called Premium) every year. Typically, the amounts range from 500-1000x.

Eg. If you are a 30 year old male, non-smoker, and you want a 1 crore life cover for 30 years, then you would need to pay around 10,000 a year. This makes to an amount of 3,00,000 over 30 years to be paid if the person does not die. While you die anytime from the start of the policy, then the family gets paid 1,00,00,000 (= 1 crore). If you don’t die, then those 3 lakhs have gone to the insurance company and it is your loss. Please ignore this loss. Let this loss occur, since I am pretty sure, no one wants to die!

Any other option than pure term insurance is more expensive. And ignore all such options like life return of premium, money-back, step up, step down, investment-insurance, etc. With the kind of marketing prowess of the insurance companies, there are so many terms that it is much easier to ignore all those things.

An example of a money-back policy will be with the same conditions of 30 year old male, 30 year policy of 1 crore would have a premium of 2-3lakhs per year, yes per year.

These days, most of the companies have some form of Direct plans in which you can buy the policy directly from the company instead of through an agent. Going through an agent usually adds up about 10-20% in the premium at the least. Prefer going direct.

What not to do?

  1. Don’t buy anything which is not Term insurance.

  2. Take the term till 60 years at max and not beyond that, even if there is an option. Basically, you don’t want to continue to have a need for income replacement at 60 years. That just means that your investment plan lacks because you don’t have enough money even at 60 years.

  3. State the details asked in an honest manner. If you are smoker, then state that. If you are hypertensive (=high blood pressure), please state that. Etc.

  4. If the company asks for a medical test, let them do it. If they don’t ask, then don’t force it. Let them do it in the way they want.

Cover Amount:

What is your NET Annual Income? Annual income = This you can get by multiplying monthly income x 12.

· If you are below 35 years, multiply it with 15.

· If you are between 35 and 50, multiply it with 12.

· If you are over 50, multiply it with 10.

There are multiple ways to do it, but for a Zero Level person, above is a decent thumb rule.

Some good companies to go to are Aegon, ICICI, HDFC, Kotak.

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