If people are asked, what forms the foundation for the creation of Personal Wealth, most of the individuals might end up saying “Savings” as the foundation stone. However, its far from true. Let’s try and understand why we are of this opinion:
Scenario 1: An individual in his/her mid 30’s who had the discipline of savings and investing on a regular basis since the beginning of his/her career following good asset allocation principle, meets with an accident and gets hospitalized. Most of the working professionals in India would have a medical coverage of around 5 lakhs provided by the employers, which does take care of the nominal medical expenses.
However, in case of severe medical conditions which attracts fees beyond 5 lakhs, then the individual and the family would be left with no other option other than tapping into the savings of the family and pay the medical expense. This would deplete the saved financial resources of the family and will drag him back by several years.
Scenario 2: In the above scenario, if we were assuming the worst outcome of the individual not surviving the accident, then the family would be left without any source of income (if he is the only earning member of the family) or reduced family income. Some employers i.e., MNC’s provide decent life insurance coverage to the tune of 3-5 times of the individua’s annual income, which can help the family for surviving few years without compromising on the life style. Whereas others provide a meagre cover of around Rs.5 lakhs, clubbed with the savings of the individual surviving family might not be able to lead the same life style and will have to make significant compromises.
Both these scenarios can be well managed using the principles of Risk Management by way of transferring the risk to Insurance companies for affordable yearly payments.
Having mentioned the solution, lets now try to understand the solutions a bit more in detail:
Solution for Scenario 1: Personal Medical Insurance (Base Policy and Super-Top up policies)
Individuals who aren’t working in organised sector or those who do not have medical insurance provided by the employers can look at availing the base medical coverage policy for the entire policy under the Family Floater option. Most of the Financial Planners also recommend an individual with medical coverage by employer also to have a personal base coverage policies because of below possibleld:
- Individual might be in between the jobs, when the family might face medical emergency
- If anyone from the family is diagnosed with a serious medical ailment during the working individual’s tenure with the organisation, expenses would be covered by the medical policy upto the policy amount. However in the future the individual might not be able to take a family floater medical policy including the impacted family member either on account of loss of job or movement from employment to self employment
Its always recommended for an individual to possess a personal medical coverage policy for his family before its too late.
Considering the rising medical cost, medical insurance cost is also on the rise. Amidst this inflation impacted world, insurance companies have designed a beautiful product “Super Top-Up” Medical insurance policy, which will provide high coverage at very affordable cost i.e., around 5-10 times the base medical policy coverage at cost as less as half of the base medical policy premium.
You might be thinking its too good to be true, yes you guessed it right, there is a catch. All Super Top-Up policies have a clause which is known as deductible. Lets understand the concept of deductible and how super top policy combined with base medical policy helps an individual in addressing the medical financial emergencies with the below scenarios:
|Scenario||Medical Expense||Base Medical Policy||Super Top-Up Policy (with 5L as deductible)||Financial impact|
|1||5,00,000||0||0||Complete expense will have to be borne by the individual|
|2||5,00,000||5,00,000||0||Base Medical Policy will cover the complete medical expense|
|3||8,00,000||5,00,000||0||Base medical Policy will cover 5 lakhs and the residual 3 lakhs will have to be paid by the individual|
|4||8,00,000||0||25,00,000||Initial 5 lakh rupee will have to be borne by the individual and the additional 3 lakh rupees will be settled by the insurance company|
|5||8,00,000||5,00,000||25,00,000||Initial 5 lakh rupee will have to be borne by the base insurance policy and the additional 3 lakh rupees will be settled by the insurance company|
Above table clearly establishes that the most advantageous situation would be to be in scenario 5.
Solution for Scenario 2: Term Insurance Policies
Term Insurance is the purest form of insurance wherein the insured pays a fixed premium to the insurance provider to cover the risk of loss of life. Insured and Insurer gets into this agreement for a fixed period of time with fixed premium. Insured gets sufficient insurance coverage with reasonable yearly premium. For ex., An healthy individual aged 30 years can get an insurance coverage of 1 crore with a premium as low as 10K per annum.
Next question is if Term Insurance is so beneficial for the insured why isn’t it so famous?
As explained earlier this is a contract where insured pays the premium for a particular duration and insured promises to compensate the insured’s nominee in case of death of the insured. If the insured survives through the contract period, insurer is not bound to pay anything back to the insured. In a country which is so obsessed with mileage ‘Kitna deti hai’, when people are told that they will not get anything in return, term insurance proposals are gets stacked below other priorities and never sees the light of the day.
In a way we should be thankful to the pandemic situation, which has helped individuals in understanding the need for taking sufficient insurance coverage to provide financial stability for one’s family even in their absence.
Having covered the basic risks which can cause a significant damage to the process of building one’s financial wealth, we can focus on the steps of wealth creation by diverting the surplus savings towards investments.
Hope this article helped you in understanding the need for building a strong foundation for your financial wealth. If you have any further questions, please do reach out to us and we would be more than happy to guide you.
That’s all for today. Please do subscribe to our blog to get notifications on the new article. Views expressed in this article is purely our own and please consult your Financial Planner before taking financial decisions. In case you have any questions or need assistance, please feel free to use the live chat option to speak with a Certified Financial Planner (CFP).
Raghu Kumar, CFP