A large number of insurance policies are sold without any discussion on the issue of over- or under-insurance. How much insurance coverage is enough for a person? Is it 10 times their annual expense? Is it five times their income? To figure this out, some firms have managed to come up with sophisticated risk analysis tools to arrive at an educated estimate of how much insurance a person needs. But experts aside, there is enough scope for common risk planning to arrive at a plausible insurance investment requirement, which can be done by all. To do this, we first need to segment insurance policies into two categories − must-have and good-to-have policies.

Must-have policies

The first thing to cover is obviously routine liabilities such as a home loan, car loan, personal loan and so on. A simple pure term cover with a period covering the repayment term is a must for the full amount of the loan. Secondly, you can make a simple calculation of your annual routine expenses − equivalent to ‘X’ times of that must be another term cover, where ‘X’ is remaining period of employment or the active earning period. Thirdly, an accident cover is another important cover one must have. An accident cover should be equivalent to five times one’s annual income. Finally, you also need health insurance suitable to your health conditions and lifestyle.

Good-to-have policies

The four policies mentioned above should be part of your insurance portfolio. Outside of that, a critical illness policy to cover specified diseases can be taken. If you plan to buy this cover, make sure the critical illness cover is equivalent to the base insurance amount. ULIPs also offer scope to save, grow wealth and build an additional life cover if invested through a regular premium plan with long-term horizon. Remember to review your insurance portfolio in case of a change in your liabilities and lifestyle.

The writer is Chief Agency Officer, AEGON Religare Life Insurance

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