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Why You Need a Larger Life Insurance Cover, Not More Cash at Home

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March 08, 2017
By now, you would have deposited in your bank the Rs 1,000 and Rs 500 demonetized notes after spending time in long queues. It is time to ask yourself the question: "Do you really need to keep all that cash at home?" Among the many reasons Indians keep cash at home is for easy access to their money during emergencies, especially medical emergencies. Take a close look, and you will realise that this approach is badly flawed. In fact, a cash provision meant to protect you actually hurts you. Here's how.
 
Why excess cash at home hurts To begin with, a stash of cash more than what is absolutely necessary, is unsafe. You really don't want to give ideas to the bad guys, do you? But the most potent threat to cash at home is from an invisible enemy: inflation.
 
Higher the inflation, faster is the rate at which your cash loses it value with each passing day. It is not unreasonable to say that India is relatively high inflation country with annual inflation always hovering between 6-8% depending on the period of measurement. In this backdrop, what you need is not cash vegetating and losing muscle by staying at home, but actually working out for you in some investment, developing the muscle of purchasing power. Here are some numbers that will drive home the point.
 
In the 10 year period of 2006-15, the average annual retail inflation was 8.51%*. So, Rs 100 kept at home during the beginning of the period became worth Rs 44.16 at the end of the period, in terms of its ability to buy various things. This means that unknown to you the cash lying at your home has been steadily losing value.
 
You would agree that in the event of a person's untimely demise, cash at home will not help cover incidental and regular expenses for long. Only ample life insurance can cover them besides covering expenses for major future needs like child's higher education. For cost effective and large life insurance coverage, opt for term plans. Take a look at these numbers.
 
A life insurance policy providing coverage of Rs 1 crore for a person aged 30 typically involves paying annual premium of around Rs 10,000. The great thing is that the premium amount remains the same during the tenure of the policy. So, in the future, it will be a better idea to redirect some of the cash that you were keeping at home but now in the bank, to be paying term plan premiums so that your family is secure.
 
Unnecessarily large amounts of cash at home also means forgoing investment opportunities that would have helped you save more for your family's future needs like children's higher education and retirement. In the future, at home, only keep the cash you might need to use right away and invest the rest. This will automatically mean higher investments for you. In fact, you can start investing right away using some of your fresh savings account deposits you made recently.

 

For long term requirements, you can consider unit linked insurance plans (ULIP) from life insurance companies. Ulips combine life insurance coverage with typically high growth from equity investments. What's more, you will get annual deduction of upto Rs 1.5 lakh for premiums under Section 80C. That's not to forget the maturity proceeds being tax free under Section 10(10)D.

That leaves us with medical emergencies. Even there, excess cash at home will not help. Here's why. Heart procedures are costly and some like a heart transplant can cost Rs 14 lakh## or more, while Rs 12 lakh# or more will be the tab for treatment of advanced cancer. In short, major medical emergencies will cost you different amounts and all of them are likely to be large. Worse, these amounts will keep rising. Then, you are likely to fall short since inflation will be silently devouring the cash. So, having cash at home will not particularly be handy in many emergencies, especially medical ones. So, is there a better way to replace cash stashed at home for emergencies?

A much smarter move is to have health insurance plan or life insurance riders for critical illness and medical expenses along with your term insurance plans. In such as arrangement, you don't have to worry about the specific eventuality since a range of them are typically covered by the plans. Let's take the case of a health plan like HDFC Life Easy Health Plan.

Under the coverage option called Daily Hospital Cash, you can get upto 1% of sum assured per day if you are admitted to hospital in a non-ICU room. The benefit would double to 2% of the sum assured, if admitted to an ICU room. Under the Critical Illness Benefit, 100% is paid as lump sum on occurrence of any of the 18 diseases. On other hand, under the Surgical Benefit scheme, the 138 specified surgeries are covered under four categories. They provide lump sum benefit of 20%, 40%, 60% and 100% of the sum assured, depending upon the category of the surgery.

What you pay for these benefits is nominal. You can get a health cover of Rs 3 lakh at an annual premium of Rs 2,714**, if you are a 35 year old male and go for Daily Hospital Cash and Critical Illness Benefit. The five year cover amount starts from Rs 25,000 and goes up to Rs 5 lakh.

Clearly, the comparison between keeping cash at home for emergencies, especially medical emergencies, and buying insurance is stark. There is little doubt that buying insurance provides you with a far superior and lower stress alternative to keeping tens of thousands of rupees in cash at home.

# http://www.newindianexpress.com/cities/bengaluru/Defeated-by-High-Costs-Cancer-Patients-Give-Up-on-Treatment/2014/06/19/article2288205.ece1

## http://timesofindia.indiatimes.com/india/Hearts-meant-for-transplants-end-up-in-trash/articleshow/18066828.cms

* http://www.labourbureaunew.gov.in/showdetail.aspx?pr_id=mcAPxQrX%2beA%3d

** HDFC Life Easy Health product brochure

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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