Term and health insurance — the bare essentials

Insurance is the one financial product most Indian households buy without understanding. The reason is simple: it is sold, not bought. A relative pitches a policy, an agent visits your office, a banker offers a ‘free check-up’ that ends in a hospital plan. By the time the policy lands, the decision has been made for you.

This lesson gives you the framework to make that decision yourself. Not which company to buy from — that is your call, with help from an IRDAI-licensed broker or agent. But what to buy, how much, and what to refuse.

The two essentials, and only these

For 95% of Indian households under retirement age, the entire insurance picture comes down to two policies:

1. A pure term life insurance plan — covering the economic value lost if the breadwinner dies prematurely.
2. A health insurance policy — covering the cost of hospitalisation for the family.

Everything else — endowment plans, ULIPs, money-back schemes, child plans, retirement plans, ‘guaranteed return’ life insurance — is at best a confusion of insurance and investment, and at worst a sales product designed to compensate agents rather than to protect families. We will say more about this in a moment.

Term life insurance — the simplest, the most underbought

Term insurance is the simplest financial product India sells. You pay a small premium each year. If you die during the policy term, your nominee gets a large lump-sum payout (the sum assured). If you survive the term, the policy ends with no payout. That is it.

Pure term has no investment component, no maturity benefit, no cash value. That is the feature, not the bug. The lack of ‘return’ is precisely why the premium is so low — and the premium is so low that adequate cover is affordable for almost any working professional.

How much term cover do you need?

The economist's answer is: enough that, if you die tomorrow, your dependants can replace your future income for the years until they are self-supporting.

Two simple shortcuts that get you 80% of the way there:

• The 10× annual income rule. If you earn ₹10 lakh a year, target ₹1 crore of cover. If you earn ₹25 lakh a year, target ₹2.5 crore.
• The needs-based approach. Add up: outstanding loans (home, vehicle, education), children's future education costs at today's prices, 10–15 years of family living expenses (also at today's prices), minus any meaningful savings already accumulated. The total is your minimum cover.

For most middle-class earners, both methods land in roughly the same range. Pick the larger of the two.

Riders — what they mean

A rider is an optional add-on to a base policy, paid for separately. Two are worth understanding:

• Critical illness rider — pays a lump sum on diagnosis of a listed serious illness (cancer, heart attack, stroke, kidney failure, organ transplant, etc.). Useful, but read the list of covered illnesses carefully — definitions are narrow and exclusions are common.
• Accidental death / disability rider — pays an additional lump sum on death or permanent disability due to accident. Cheap, often worthwhile, especially for those who travel or commute heavily.

Avoid riders that overlap with what your base health insurance should already cover. A rider should fill a real gap, not pad the agent's commission.

The endowment / ULIP trap

India's insurance industry sells far more endowment, ULIP, and ‘guaranteed return’ policies than pure term. The commission structures are the reason: pure term pays an agent a small one-time amount; endowment and ULIP pay much larger commissions, often spread across years.

From the customer's perspective, these combined products are usually bad on three dimensions:

1. The insurance cover is far too small. A 35-year old paying ₹50,000 per year for an ‘endowment’ policy might get a sum assured of only ₹5–10 lakh. The same ₹50,000 in pure term would buy ₹3–5 crore of cover.
2. The investment return is mediocre. The long-term returns on traditional endowment plans typically cluster around 4–6% — barely above inflation. ULIPs do better on returns but have heavy upfront and recurring charges that compound against you.
3. The lock-in is brutal. Surrender within the first few years and you may lose 50–100% of premiums paid. This locks you into a bad product even after you realise it.

If you already hold an endowment or ULIP, the question is not whether you should have bought it (you probably should not have). The question is whether to surrender, make it paid-up, or continue. That decision depends on years already paid, surrender penalties, and alternative uses for the freed premium — and is exactly the kind of question a fee-only adviser can help you with.

Health insurance — the second essential

One serious hospitalisation can wipe out a decade of savings. Indian medical inflation runs at 12–14% per year — well above general CPI. A ₹5 lakh hospital bill today is a ₹15 lakh bill in fifteen years. Health insurance is not optional for any household above subsistence-level income.

How much health cover

For a family in a metro city, a baseline floater of ₹10–15 lakh is the modern minimum. In tier-2 and tier-3 cities where private hospital costs are lower, ₹5–10 lakh is workable as a starting point.

A common cost-efficient structure: a base policy of ₹5–10 lakh plus a top-up or super top-up of ₹20–50 lakh. Top-ups kick in only after a deductible — they are dramatically cheaper than the equivalent base cover, and the combination gives you very large total protection at a manageable annual premium.

The health-policy vocabulary you must know

• Sum insured — the maximum the insurer pays for claims in a policy year. Reset annually.
• Family floater — one shared sum insured across all family members, instead of separate covers each. Cheaper, but if one member has a major claim, less remains for the others that year.
• Room-rent capping — many policies limit how expensive a room you can choose. If you exceed the limit, the insurer can proportionately reduce all other claim charges as well — a much larger penalty than just the room cost. Always prefer policies with no room-rent cap, or a cap high enough to cover a private room in your city.
• Co-pay — the percentage of every claim you pay out of pocket. Common in senior-citizen plans (often 10–20%). Avoid in regular plans where possible.
• Sub-limits — caps on specific procedures (e.g., cataract limited to ₹40,000, knee replacement to ₹2 lakh). Read the schedule carefully.
• Pre-existing disease (PED) waiting period — illnesses you already have when you buy the policy are not covered for a stated period (typically 2–4 years, sometimes up to 4 years). Disclose all pre-existing conditions truthfully at purchase — non-disclosure is the most common reason claims are rejected.
• Cashless network — the list of hospitals where the insurer pays directly without you needing to front the cost. A wide cashless network in your city is the most practical comparison metric across plans.
• No-claim bonus (NCB) — extra sum insured added every year you do not claim, typically 10–50%. Worth factoring into long-term cost-benefit comparisons.

Parents and senior citizens

Health insurance for parents (60+) is one of the highest-stakes decisions in middle-class personal finance. Premiums are several times higher than for younger family members. Co-pays of 20% are common. Pre-existing disease declarations matter even more.

Three observations from the field:

• Buying a separate senior-citizen-specific plan often gives better terms than including parents in a family floater.
• Some insurers refuse new policies above certain ages (typically 65 or 70). The window to enrol parents is narrower than people realise.
• Lifetime renewability is a non-negotiable feature. A policy that the insurer can refuse to renew after a major claim is not really insurance.

Questions to ask before buying anything

Adapt this list to whoever is selling you a policy — agent, broker, banker, online platform. A reputable seller answers all of these directly without changing the subject.

1. Is this pure term / pure health, or does it combine insurance with investment? If it combines, why?
2. What is the sum assured / sum insured, and is it enough by the rules-of-thumb above?
3. What is the claim settlement ratio (for life) and incurred claims ratio (for health) of this insurer over the last three years? Both are public IRDAI data.
4. What is excluded? Read the ‘permanent exclusions’ and ‘waiting periods’ section before paying the first premium.
5. Is the seller IRDAI-licensed? Brokers, agents, and corporate agents (banks) are all licensed. Their licence number should be visible on every document. Verify on the IRDAI website if unsure.
6. What is the agent or broker's commission on this policy? They have to disclose it on request. Higher commissions correlate with worse-for-you products.
7. What happens if I miss a premium? Term policies typically lapse with a grace period; understanding lapse and revival rules avoids losing cover when you most need it.

What this lesson did not cover

• Motor, home, travel, and other general insurance — these are essential but each is its own discipline. We will cover them in the General Insurance track.
• Liability and professional indemnity — relevant for self-employed professionals and business owners. Layer-3 material.
• Tax treatment of insurance premiums and payouts — Section 80C, 80D, 10(10D) — covered in our taxation lesson.
• Choosing among specific insurers — explicitly out of scope for this educational platform; talk to a licensed broker or adviser.