Investment tips: What percentage of your income should be reserved for insurance? Read what expert says

Tarun Mathur, Chief Business Officer, General Insurance, Policybazaar.com has expressed his views on the quantum one should keep aside for the purpose of insurance.

New Delhi: Many salaried people have separate chambers to park their fund, while insurance one such instrument that is increasingly becoming an indispensable part of their investment portfolios. Additionally, the uncertainty caused by COVID-19 and the overall rise in health issues has led to an increase in awareness level of people towards the necessity of insurance.

A very pertinent question that also crops up while investing in insurance is what part of the income should be reserve for insurance?  (Also read: How can an employer manage health insurance cover at the time of job transfer?)

Tarun Mathur, Chief Business Officer, General Insurance, Policybazaar.com in a Q&A with Reema Sharma of Zee Media expressed his views on the quantum one should keep aside for the purpose of insurance.

How much should you keep aside for Term Life insurance?

Mathur says, when purchasing a Term insurance, the big question arises about how to value a certain human life in monetary terms.

“Everyone’s needs differ from one another and so, a realistic calculation for the policyholder should be based on adequately meeting the family's everyday financial requirements and clearing any debt if around. Hence, a lower sum assured will certainly not suffice as it will not solve long-term objectives,” he adds.

Mathur advises that the proportion for a life insurance policy should be 12 to 15 times that of the annual income of the insured. This can be calculated by analyzing the income against the premium paid and ensuring the former can support the dividend alongside the regular expenses of the household. For example, if a person is presently earning Rs 10 lakh per annum, then they should choose a coverage of at least Rs 1 to 1.5 crore, the premium of which will cost around 1500-2000 per month, amounting to roughly 2.5% of your salary.

What should be your fund for Health Insurance?

The COVID-19 pandemic has taught everyone that it is important to prioritize health over and above everything else. A decent health insurance policy will cover everything from pre and post-hospitalization, ambulance costs, and day-care procedures, cover ICU and room rent and provide cashless hospitalization, depending on the kind of policy chosen.

Mathur recommends a ratio is 4-5% of the salary when making this vital investment. For instance, if you earn Rs 1,00,000 monthly, keeping aside a health insurance cost between Rs 4000-5000 is advisable. However, if your family history has medical issues or a family member has co-morbidities, he suggests that people should buy a plan covering pre-existing diseases and augment it with useful riders for enhanced protection.

What should be the quantum of fund for Other Insurance?

Apart from life and health, the non-life or general insurance covers areas like home insurance, motor insurance, etc. Thus, from the remaining amount, the rest should be ideally divided basis its value.

“However, experts suggest 3-4% of the family's income for a household earning approximately Rs 12 lakh per annum. For instance, third-party motor insurance is mandatory to get a vehicle on the road in India. But, a comprehensive plan that comes at an additional cost is advisable as it guards against all factors. To arrive at an amount here, equate the sum insured to the market value of your vehicle. So, basis the make and model, you will spend anywhere between Rs 10,000-20,000 for a year. Similarly, home insurance is also determined by a number of factors like super built-up area, geographical location and rate of construction,” adds Mathur.