What percentage of your salary should you spend on life and health insurance premiums?
Given the vagaries of life and health, insurance is a must in everyone’s financial plan. It offers the essential financial cushion in the event of an unfortunate event. However, salaried employees often face a dilemma as to what percentage of their salary should be allocated to paying life and health insurance premiums. More so in the wake of the rapid rise in the cost of living in cities.
Experts say that buying insurance with a low sum assured will not help in the long run. When it comes to health insurance, the general rule is that 2-5% of your monthly income should be spent on health insurance coverage. But this is just a rule of thumb and one can vary it according to their current needs depending on the family members, especially the older members.
“When buying health insurance, it is important to consider the future value of money. Any treatment that costs Rs 5 lakh today may cost more than Rs 50 lakh 18 to 20 years later , considering the skyrocketing medical inflation.It is advisable to opt for a minimum sum insured of around Rs 10 lakh, and it can go up to Rs 25 lakh.If your pocket allows, you you can also go much higher,” Vivek Chaturvedi, head of direct sales at Digit Insurance, told FE Online.
Experts say that a higher sum insured does not translate into a commensurate increase in premiums.
“As a general rule, we advise you to opt for a sum insured equal to your annual income. If you buy Rs 10 lakh cover at age 25, you will probably spend between Rs 700 and Rs 1,200 per month depending on which insurer you opt for,” Chaturvedi said.
“It’s also important to consider top-ups to enhance coverage and maximize benefits if you only have employer-sponsored coverage or coverage with a lower sum insured. Supplements are an affordable way to improve your health coverage,” he added.
Rakesh Goyal, director of Probus Insurance, said there should be at least Rs 10 lakh cover for the family and a top-up or super top-up if needed. Typically, policyholders should spend about 8-10% of their income on their insurance needs.
Experts say that buying insurance for a lower insured amount will not solve the long-term goal of their financial planning.
“When considering life insurance, it’s not just about looking at affordability of premiums. The policyholder should ensure there is enough coverage to meet the family’s financial needs and pay for debts when he is not around.As a rule of thumb, life insurance should be around 10-15 times your annual income.So if someone is earning Rs 10 lakh per year, he should have coverage of life insurance (term plan) of Rs 1-1.5 crore,” Goyal said.
However, the premium shouldn’t be the only factor to consider when purchasing a life plan.
“Premium shouldn’t be the only factor in arriving at coverage, other factors like pre-existing conditions, medical history and hereditary diseases that may arise in the future matter. For life insurance again, the premium should not be based on the percentage of salary but on existing and future liabilities such as home loans, children’s education, etc. said Vijay Singhania, President of TradeSmart.
When it comes to car insurance, third party liability insurance is compulsory for driving on Indian roads. In addition to third party coverage, it is also important to purchase damage coverage that protects you and your vehicle against damage caused by accident, fire, natural disaster, theft, etc.
“Make sure the sum insured you opt for is equal to the market value of your car. Depending on the make and model of your vehicle, you may have to shell out between 10,000 and 20,000 rupees per year. As for non-life insurance, a family’s comprehensive insurance needs can be met by spending 3-4% of family income if the household income is Rs 12 lakh per year,” Chaturvedi said. .