Accident insurance? Here are some tips

Accidents don't just happen on the roads. They can occur in your office, while travelling or entertaining, or even at home while doing everyday chores.

In terms of your finances, they make a double impact. On the one hand, your healthcare spending increases as you undergo treatment. On the other, your income is disrupted till you recuperate. It is here that accident insurance plays the crucial role of keeping the pincers from closing on you and your family.

According to experts, for people below 45 years of age, the risk of accident is much higher than of health problems. Health risks and expenses mount with age and tend to typically surface when a person is 45 years or older. They also say that people between 25 and 55 years of age are twice as likely to get disabled than die. Given that a large number of disabilities occur through accidents, few can argue against the importance of accident insurance.

What's on offer. In India, you have two major insurance options to cover the risk from accidents. First, you can opt for stand-alone personal accident insurance policies sold by general insurance companies. Second, you can also take an accident rider along with a life cover.

PAIP. This policy solely covers any bodily injuries due to accidents, which are external, violent and visible, as the definition goes. It covers you for four contingencies that may arise from an accident: death, permanent total disability, permanent partial disability, and temporary total disability. Like benefits of all insurance policies, buyers need to understand very well how these contingencies are defined in the policy.

Typically, the premium is around Rs 125-750 for a PAIP with a Rs 250,000 cover. Any person aged between five and 70 years can take this policy (in some cases 80 years). Their dependent family members between 5 and 80 years can also be insured under it.

Premiums don't vary with age and insurers give a discount of around 10 per cent when you cover family members. People whose work is more static in nature, such as lawyers, accountants, teachers or the self-employed, are regarded as normal risk by the insurers.

Builders, contractors, engineers and veterinary doctors, whose job includes frequent site visits, are classified as medium risk. Those who work in high-risk industries, with chances of accidents, fall in the high risk category. PSU insurers charge premiums according to your risk profile, whereas some private insurers charge a flat premium, irrespective of your risk profile.

Opt for comprehensive coverage. When you go for a PAIP, opt for a comprehensive coverage of the four contingencies of death, permanent total disability, permanent partial disability, temporary total disability even though you might have the option of covering one, two or three of them.

The reason: such a cover provides weekly payouts at one per cent of the sum assured, subject to a ceiling of Rs 6,000, in case of temporary total disability. For this benefit, you have an upper ceiling of Rs 500,000 or 25 times of monthly salary, whichever is lower. One also needs to remember that there is also a cap for the overall cover under PAIP, which can be 60-72 times monthly salary, depending on the policy.

Accident riders. Like other life insurance riders, the maximum accident cover under riders is 30 per cent of the sum assured. Since most life covers end at around age 65, the coverage from accident riders end with the base policy.

Another important point to remember is that once the claim is made, lump sum amount will be paid in case of death or staggered payments made in case of permanent total disability - say 10 per cent of the rider cover annually over 10 years. In case you survive the accident, for most companies, the coverage effectively ends from the time you make the claim.

PAIP vs accident riders. If you compare the two options, PAIP has an edge for those covering all the four contingencies - you will get a weekly payout in case of temporary total disability; a facility that riders don't have. This facility gives you a better income replacement stream too.

Also, PAIP's coverage in terms of age limit is more and the coverage doesn't end after a claim is made, as is the case with accident riders. There's another advantage. Says Ajit Narain, managing director and CEO, IFFCO-TOKIO General Insurance, "A customer, who does not need a long-term commitment required in a life policy can take a stand-alone personal accident cover."

Determine your requirement. After getting a fix on the option that you prefer, you need to determine the amount of accident cover you need. The calculations need to follow the same principle as computation of life insurance (See Cover Needs). For purposes of illustration, we take a person suffering from permanent total disability after an accident that has completely ended his ability to earn a regular income from a job.

Assuming a take home pay of Rs 25,000 for a 35-year-old individual (expected to live till age 75) and Rs 12,000 take home pay for the spouse, investment income of Rs 6,000 and reduction in work-related expenses of Rs 2,500, we arrive at a monthly income requirement of Rs 18,090 for the rest of his life.

The problem with the available options is that the person concerned will be able to get accident cover till 60-72 times of his income. This means that such a cover will work for him, at best for a decade.

Need for larger and wider covers. The example clearly indicates the urgent need for larger accident covers for all kinds of contingencies arising from accidents. There is also the need for other products that would cover other forms of disability.

Remember, disability may not just arise from accidents - it can occur from illnesses and diseases, economically crippling a person for the rest of his life. While the job is cut out for the insurers, meantime, you can at least ensure that you get a cushion that's available to help you recover in case you are hit badly in a moment of bad luck.

Smart tip
Get a standalone accident cover from a general insurance company in order to get a discount of 10 per cent by covering other family members against accidents.