How much insurance do you actually need?

Insurance is the pillar people postpone, because nothing bad has happened yet and the premium buys no visible benefit. It is also the only part of a plan whose absence can undo a decade of saving in a single month. Two policies do nearly all the work: term life and health.

Separate insurance from investment

The single most expensive mistake in Indian personal finance is buying protection and investment in one product. Endowment plans, money-back policies and ULIPs bundle a small amount of cover with a mediocre return and a long lock-in, and they are sold hard because they pay well to sell.

Bought separately, the same money buys far more cover and a far better investment. A term plan is pure protection with no maturity value, which is exactly why it is cheap. If a policy promises to give your money back, you are paying for that promise, and the price is most of the return.

Term cover: how much

The common rule of thumb is 10–15 times annual income. It is a reasonable default, but the honest calculation is a replacement calculation: what would your dependants need, for how long, plus what they would have to settle.

• Annual household expenses your income currently covers, multiplied by the years until your youngest dependant is independent.
• Every outstanding loan, so nobody inherits an EMI.
• Large known future costs — education, a sibling's responsibilities you carry.
• Minus what already exists: current investments, EPF, any employer cover.

Employer cover is worth counting and not worth relying on. It ends when the job does, which is often exactly when you are least able to buy a new policy.

If nobody depends on your income, you may not need term cover at all. The purpose is to replace what dependants lose. No dependants, no loss to replace.

Term cover: the practical bits

Take the cover to at least the age you expect to stop working, or until the last dependant is independent. Premiums rise sharply with age and with any health condition acquired between now and later, so the policy you buy at 30 is materially cheaper than the same policy at 38.

Answer the medical and lifestyle questions accurately, including tobacco use. A cheaper premium obtained by omission is the one thing that reliably causes a claim to be rejected, and a rejected claim arrives at the worst possible moment for the people you bought it for.

Health cover: the one most people under-buy

Medical inflation in India runs well ahead of general inflation, and a cover that looked generous when you bought it can look thin a few years later. A single hospitalisation in a metro private hospital can comfortably exceed a small floater.

A family floater is usually the efficient structure for a young family. Two things to check beyond the sum insured: room rent limits, which quietly cap the entire claim if you are admitted to a room above the allowed category, and the waiting period on pre-existing conditions, which is why the time to buy is before you need it.

As with term cover, employer health insurance is a supplement rather than a plan. Hold your own policy so that a job change does not leave the family uncovered and a new waiting period does not start from scratch.

What you probably do not need

Most add-on and single-risk covers sold at the counter — gadget insurance, extended warranties, narrow disease-specific plans — are priced for the seller. The test is simple: could you absorb this loss from your emergency fund without changing your plans? If yes, insuring it is buying certainty you do not need.

The tax point, briefly

Premiums attract deductions under the old regime and largely do not under the new one. This is a reason to check which regime you are in with the income tax calculator, and it is not a reason to buy a policy. A deduction on a bad product still leaves you with a bad product.

Where this fits

Protection is a pillar of your Financial Health Score because it is the one that determines whether everything else you have built survives a bad event. A strong savings rate with no health cover is a fragile position, however good the returns look.