When Anirudh Bansal, a Pune resident bought a term life insurance plan five years back with Rs 70 lakh life cover he was single with no financial dependents. Today, he is married and has a two-year-old daughter. Now he feels that his Rs 70 lakh term cover might not be sufficient to meet the family’s financial needs in case anything unfortunate happens with him. He admits while his cover may be enough five years back, he needs to plan as his kids will grow and his income will also rise significantly, as he progresses in his career path. To cover all possible financial obligations, he would perhaps need a term plan with higher cover. Unfortunately, policyholders like Anirudh are only a handful who give utmost importance to sum insured/life cover amount in a term life insurance plan.
To most customers buying a term insurance plan, Rs 1 crore cover amount seems massive and sufficient to meet all their family’s future financial needs in case of the death of the policyholder. A little over the last decade, it is being observed that most customers buying a term insurance plan seem to have become psychologically comfortable with Rs 1 crore figure as it has turned out to be the most popular number/coverage amount amongst people buying a term plan. Moreover, of late, people have started to skip the process of doing the basic math when calculating the right cover amount for their term insurance plan. When deciding on the coverage amount, most people forget to take into consideration some important factors like outstanding loans, the relentless march of inflation, one-time expenses such as children’s education and marriage, and most importantly the retirement needs of the spouse.
A recent Swiss Re report states “Indians are highly underinsured.” No doubt, the awareness around protection plans in India has increased by manifolds in the last 8–10 years with the introduction of online term plans. However, the average Indian household is still highly vulnerable to financial disruption in case of the death of the breadwinner. The report highlights that shortfall in mortality protection in India is as high as 92 per cent, which means; the average Indian is insured for Rs 8 lakh although his/her family requires an insurance cover nothing less than Rs 1 crore in case of death of the breadwinner.
Few important points to consider while arriving at the life cover amount are the current liabilities, existing investments, and the needs of the family along with inflation that grows with time as the financial situation of every individual is different from others and the ‘one-size-fits-all’ formula does not apply when buying insurance to cover financial expenses. A thorough analysis of expenses, liabilities, investments, and requirements is always recommended.
Ideally, the life cover of your term life insurance plan should be majorly based on your human life value that assesses the amount basis your life stage. A simple formula that a Human Life value calculation throws out is that a person of age below 35 years should buy a cover 25 times of the annual income, age 36–40 years should buy a cover 20 times of the annual income, age 41-45 years should buy a cover 15 times of the annual income, etc.
For example, a 30-year-old with Rs 20 lakh annual income should have a total life cover of Rs 5 crore. While this may seem huge for a few, the reality lies in the detailed calculation. A simple calculation basis how long-term FD rates and inflation movement will show that the family will have to take a loan for their regular expenses in case of the life cover being Rs 1 crore whereas, with Rs 5 crore they will be able to maintain the current lifestyle stress-free with the best of education/healthcare.
A term life insurance plan should ideally be linked to your requirements and not a popular figure like Rs 1 crore or Rs 2 crore, no matter how big it may appear to you. A must to remember – while emotional loss due to the death of a family member can never be compensated, term insurance will ensure that the dependents do not have to go through any financial stress while bearing the loss of the loved one.
The author is Head-Term Life Insurance at Policybazaar.com. Views expressed are that of the author.
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