Seven Money Resolutions for 2011:
#2 — Purchasing Disability and Personal Accident Insurance

Resolution #2:
I want to purchase disability insurance (commonly called personal accident insurance) for both myself and D.

I strongly believe that once you have the foundations — an emergency fund, health insurance, and zero-debt — in place, your next step ought to include having a disability or personal accident insurance in place for each family member who you believe faces this risk. In our case, both D and I need to have individual policies since we both face this risk.

I had done some research a few months back and had observed that there are basically two types of disability/personal accident policies on offer:

  1. Those that pay a fixed lumpsum one-time, and
  2. Those that pay a fixed sum each month for a certain number of years.

The one-time fixed lumpsum model (such as this policy) is the most common type on offer. If you opt for such a policy, it makes sense to purchase the highest possible cover for the longest duration since you pay a one-time premium for the entire duration. I’m not too keen on this model because the payout is 100% upon accidental death (and hence of no use to you and you’d be better off buying a cheaper term life insurance plan) and between 25% to 100% depending upon what portions of you become disabled (example: for a Rs 10 lac policy you’ll only get Rs 2.5 lac if you lose one eye and the policy most often ceases at that point).

The fixed sum each month model (such as this policy) are not widely on offer. And it’s close to impossible to extract any information from the insurer on such policies. But I really like this model — a fixed-sum (you can set this amount to be equal to your monthly living expenses) each month for the next several years (up to 20!) in the event of a disability. That’s much much better and is what you’d typically want were you to become disabled.

However, I’m yet to decide which model to opt for and I’d love to hear your thoughts on this before I go ahead and make a purchase. What would you suggest?

7 thoughts on “Seven Money Resolutions for 2011:
#2 — Purchasing Disability and Personal Accident Insurance

  1. Yesterdays post was very good.

    Todays post and tata’s AIG plan: Say one needs Rs. 20,000 a month. Tata AIG needs to shell our Rs. 48 lakhs over 20 years. I would think the premium rates would be very very high and so would the rejection rate.

    I see nothing wrong with getting a (partial) lump sum put it in the MIS from the post office or a FD and get decent monthly income. If you die of the disability the money goes to the nominee. Acc. insurance rates from United India and New India are cheap.

    Also claiming I would expect to much tougher than a mediclaim.
    For example if a genuine accident site gets infected because it a took a while to get medical attention when you are in a remote place, TATA AIG can refuse payment since it does not cover bacterial infections. The next you go trekking think about that!

    The policy wordings talk about 25%, 50% payout etc. like any other policy and one must die within 365 days to get sum assured!

    If I buy this this will the worst financial decision I would have made and I have made several in the past.

  2. @pattu:

    That’s a wonderfully-genuine perspective. :-) Thanks! Made me think again on whether I really need to buy disability insurance. You’ve also double-guessed a soon-to-be-published post (on planning towards generating a monthly income) in this series.

    I will come back to this topic once that post gets published.

  3. Thanks Patta for that valuble information. Just a doubt though, are you suggesting not to go for accident insurance after all?

    And, as ever, thanks to you Vinaya for creating such a wonderful financial information center.

  4. Sandriano, No I am not saying that. Accident insurance is good but this plan from TATA AIG seems very fishy to me. The time tested model of paying a few thousand for say Rs. 10 lakhs should be fine. I dont have one myself and am thinking about it.

    It depends on the requirement of a person. For example I work in a central govt organization in a tenured position. If an accidient befalls me I will not be thrown out. I will continue to earn full pay. So why do I need it is a question I need to ask myself.

    If one is in a corporate setup, one will get a lumpsum which could be invested (find out from HR/accounts if they know of such a case). See if this lumpsum is enough to sustain your family and then decide on sum assured.

    Also accidntal insurance must be accompanied with large sum asured in medicalim. Otherwise acc. money will be used for hospital bills and the family needs to find other sources of income.
    Lots of morbid thoughts are require to plan the safety of ones family!
    Vinaya, excuse the long comment.

  5. @Sandriano:

    Thanks for the vote of confidence. :-)


    I’m glad that you take the time to express your thoughts in detail through your wonderful comments. I’ve personally learned a lot from your comments on my blog as well as from the ones that you leave on other personal finance blogs that I read.

  6. @ABT:

    I’m not too comfortable with such policies. Reason being that the definition of “a critical illness” is quite vague and open for interpretation. This gives the insurance company a wide leeway in refusing to honor its commitment.

Leave a Reply