Everybody talks about the need of adequate insurance and asks people to take maximum cover. But how big the maximum may be?
Despite knowing the importance of insurance, very few people take it seriously and most treat it as an instrument to save tax. Probably this is the reason that everybody talks about the need of adequate insurance and asks people to take maximum cover. But how big the maximum may be? Can a person take unlimited insurance?
The answer is ‘no’. Although insurance brochures would only list the figure of minimum sum assured and say ‘no limit’ against maximum, but there is a limit up to which an individual may take an insurance cover on his life, depending on age, income and health conditions.
So, as per guidelines, an insurance company would allow a healthy adult man up to 30 years of age to take an insurance cover of maximum 22 times of last 3 years’ average annual income and the limit would come down to 17 times of the 3 years’ average when he turns 31 years.
For example, X is a 30-year old healthy person and has got annual salary of Rs 4.8 lakh, Rs 5 lakh and Rs 5.2 lakh in the last three years. As his average salary of the last three years is Rs 5 lakh, he may take an insurance cover of Rs 1.1 crore. However, he would get a cover up to Rs 88.4 lakh if he takes the insurance a year later, assuming that his last salary was Rs 5.4 lakh per annum.
So, X can take Rs 1 crore cover only up to 30 years of age.
Similarly, 50-year old Y, who draws the same salary as X, would get a maximum cover of Rs 60 lakh, when his age is 50 years and when he turns 51, he would be eligible to get a cover of Rs 52 lakh only.
The following table lists the eligibility criteria for getting an insurance cover, taking the sum assured of all the policies a person has.
Cover as a multiple of average of 3 years’ annual income
Up to 30 years
Up to 40 years
Up to 50 years
51 years and above
However, calculations are different for the lives of children as well as for female, where apart from age, income, health and habits, marital status also play a role.
Not only on the figure of the sum assured, capping is there even on accidental death benefits, premium waiver benefits, critical illness benefit etc. So, one should be careful while taking a fresh insurance cover and availing riders on it. It is always advisable to mention details of all the existing policies, while applying for a new one and let the underwriter take decisions.