How to crash-proof your income & life

Life often seems governed by a cruel variant of Murphy's Law: just when you've saved enough to ensure a comfortable life, something happens to destroy it. It could be an accident that cripples you permanently, a fire that destroys your home, or a fatal illness. This may be a pretty bleak picture, but let's face it, these things do happen and can happen to anybody.

If you are a fatalist, you may just say que sera sera, and do little else. But in practical terms, you can ensure that your finances are not thrown totally out of gear. Buy different insurance products so that you are covered against any eventuality that affects your assets or your wealth-creating potential.

"In the long term, insurance protects us against unfortunate events that are likely to occur," says Jayant R Pai, vice-president, Parag Parikh Financial Advisory Services.

Experts say you should try and take cover for all insurable risks. If you are aware of the major risks and buy the right products, you can cover quite a few bases.

Risks to wealth

The first step is to identify the major insurable risks.

Life: In the event of your untimely death, your financial dependents could be left struggling to maintain their standard of living. They may be forced to sell assets, including investments you may have made for the long term.

Health: In the past five years, hospitalisation costs have gone up faster than inflation. In case of an illness, you may have to spend your savings on treatment and other related expenses, which will interrupt the process of wealth creation.

Income: Risks to your income can come from any quarter. However, the risk that is insurable comes from accidents that cause disabilities and prevent you working, either temporarily or permanently.

Professional hazards: Professional decisions or conduct (especially in the case of doctors and lawyers) can mean loss of future clients. If you are sued and get an adverse verdict, you may be forced to draw on your wealth to settle.

Assets: Mishaps such as a car crash or a theft mean that you will have to spend existing wealth to replace your assets, on which money had already been spent.

Outliving wealth: There is a very real possibility that you will outlive the wealth you have created and saved. It makes sense to insure against this risk.

Debt repayment: An untimely death, accident or loss of a job can prevent you from honouring your loan repayment obligations. In such an event, it is your wealth from investments that you will have to fall back on.

Take cover

Now take a look at some of the insurance products you can consider.

Life insurance: "Term insurance is the most cost-effective life insurance product," says B. Srinivasan, a Bangalore-based financial planner. Unlike other life insurance plans that come with an investment or savings component, term plans are products that cover only your life. This means your dependents or nominees get the sum assured on your death (See table: Wealth's Life Shield).

Samir Kapur, 34, head, corporate communications, ESPN Star Sports, says, "I started my career in 1993 and my father made me take endowment policies. However, I realised that one must look at insurance for protection and since 2003, I have been a votary of term cover."

Today, Kapur has a Rs 20 lakh (Rs 2 million) cover for 20 years with an additional Rs 10 lakh (Rs 1 million) critical illness cover at a premium of just Rs 7,500 a year. "I know I will get nothing at the end of 20 years. However, if something were to happen to me, my wife and children will have the financial support," he adds. As Srinivasan says, "This cover is only to protect your family and not to fulfil your financial goals."

How much life insurance should you take? A good way to estimate the sum assured you need is to multiply your current annual income with the number of years left till you retire, and subtract the current value of your assets from the sum. Keep re-visiting this figure as you age and whenever your income changes.

Health insurance: You may see no reason to take health insurance. After all, you may say, health insurance does not cover all medical expenses. But, as V. Jagannathan, managing director of Star Health and Allied Insurance, counters: "One must take a health insurance plan to offset the rising healthcare costs and not dip into savings earmarked for other financial goals."

Ask Akruti Parashar, 24, Delhi-based software professional, why health cover is a good idea. "One morning I woke up with a virulent pain in the stomach. It was detected to be appendicitis and had to be operated upon immediately," says Parashar. Thankfully, she had taken a health insurance cover that paid her hospital and medical bills, which added up to  a total of Rs 32,000.

Pai says people should take the maximum possible cover before 40. He adds that if one takes advantage of the no-claim bonus incentive, the maximum health cover offered can be raised to Rs 10 lakh.

In case of software professionals who make frequent trips outside the country, Suraj Kaeley, chief marketing officer, MetLife India, recommends international travel cover. "Even if your company is providing travel cover, you should insist on taking one for yourself. While travelling, the last thing one wants is to be unable to pay for an illness," he says.

Accident insurance: Your income and assets can be under threat from unforeseen accidents. "While a health policy may cover the immediate expenses associated with hospitalisation, it provides no compensation for the loss of livelihood," says Srinivasan.

Sometimes, accident cover appears even more important than other covers. For instance, 45-year-old automobile engineer, Ravishankar Suri, has no other insurance save an accident disability cover his employer recommended, given the perils of his job.

Disability riders can also be bundled with life insurance policies if you don't want a standalone cover offered by general insurance companies. However, these standalone covers can work out to be quite cost effective. The policy is so structured that in the case of temporary disability, like a fracture, the policyholder can avail of a weekly compensation of 1 per cent of the sum assured or Rs 5,000 a week, whichever is lower, running up to two years (See below table: Crash-proofing income). There are also hospital cash policies, which give you a daily allowance for each day spent in the hospital.

Professional hazards: If you are a doctor or a lawyer or any other professional, you definitely need to buy professional indemnity cover. "One stroke of ill luck can wipe out your entire professional goodwill and savings. The indemnity policy covers are designed based on occupation, the amount of risk you are exposed to and how long you wish the cover to be in force," says Praveen Vashishta, CEO, Howden India, an insurance brokerage.

Auto and home insurance: Insuring risks to yourself is not entirely enough. You must also make provision for risks to your automobile, home and its contents. "I was waiting patiently in a long traffic jam, when suddenly the truck next to my car started to inch in," says Shabd Murty, 30, whose Fiat Palio was damaged through no fault of his. His car was badly damaged and he ran up a repair bill of Rs 20,000. Thankfully, his car insurance policy for 'own damage' benefit saw him through.

Similarly, a home insurance policy will secure the roof over your head and many of your valuables under that roof. "Householder's insurance is something that protects your house and its contents from fire and allied perils. But still there are not many who realize the worth of this insurance," says Antony Jacob, managing director, Royal Sundaram. He is right. One tends to forget that a Rs 20 lakh home with contents worth Rs 5 lakh (Rs 500,000) can be covered for as little as Rs 3,200 (See table: Sheltering Wealth).

Annuities: With increasing life expectancy and inflation, you cannot be sure whether the wealth accumulated during your working life will last you through retirement. Determining what you will need in retirement is a complex exercise. "You need to examine your current expenses, inflation, likely returns on investment and how it will perform over the next two to three decades," says Vivek Khanna, marketing director, Aviva Life Insurance.

Depending on the size of your retirement savings, you can invest partly or fully in annuities which provide you with a monthly income.

Life insurance pension plans are products that allow you to save for retirement and get regular retirement income. You can even buy annuities from retirement investments that are made in other instruments. Vijay Beri, 64, retired as an Air India pilot in 2000. He says, "Although my LIC annuities are not enough to completely support me now, but it at least takes care of electricity and telephone bills."

Mortgage protection policies: Those days when taking a loan was shameful, are long gone. Today, it's a matter of course to borrow, whether it's for a house, a car, or consumer durables. But what happens if you have an accident and are unable to earn any more and, therefore, unable to pay back the loan? "Mortgage protection plans can be used to protect your dependents," says Kaeley.

Mortgage protection is designed to be a reducing term-cover plan that many lenders build upfront by adding the one-time premium to the loan amount. Home loans bundled with accident policies also deserve consideration.

Buying various insurance policies and riders will not make your wealth risk-proof. What it will do is go a long way in mitigating some of the major risks that can set you back in the process of wealth creation. Armed with adequate insurance, you will be better equipped to deal with untoward events. Without it, you may very well be very sorry.