With Rs 1-crore life insurance cover being a popular term, most people seem to be mentally comfortable with the amount even without doing the basic math.
When Sunil Thakur – a 28-year-old Bangalore-based IT professional – bought a term insurance cover of Rs 1 crore in 2016, he was single and had no dependents. Now married and father of a 1-year-old girl, Sunil strongly feels that his Rs 1-crore term plan may not be sufficient to sustain his family’s needs and cover his life goals 15-20 years down the line. He believes that it’s just the start of his professional and personal life and both his income and expenses will rise significantly in the next couple of years. And to cover the loss that incurs due to Sunil’s sudden death, perhaps a cover with higher sum assured might be required.
However, the sad part is that people who think and calculate like Sunil are very few. To most policyholders, the amount of Rs 1 crore seems huge. They believe that the cover is quite sufficient to take care of all their financial needs in case something unfortunate happens to them. With Rs 1-crore cover being a popular term, most people seem to be mentally comfortable with the amount even without doing the basic math. How most people come to the conclusion that Rs 1 crore cover is enough is by calculating that if the family deposits Rs 1 crore in a bank account that earns 7% interest, it will get them a monthly income of Rs 58,333. To them, the amount is enough to sustain the expenses of an average middle-class Indian household.
Though this calculation may seem ‘legit’ on paper, it won’t work when you take into consideration the many factors like outstanding loans in the name of the policyholder, one-time expenses like education and marriage of kids, the relentless march of inflation, the everyday financial needs of the family, and retirement needs of the spouse. What calculations of most industry experts suggest is that if the policyholder has a loan and two kids, the Rs 1 crore received on the death of the policyholder will not sustain the family for more than 10-12 years.
Unfortunately, most of the Indians buying a life insurance policy are underinsured! No doubt, the demand for pure protection term plans has increased considerably in the last few years, but the disparity in life protection in India is still as high as 92%. Attributing low awareness around adequate coverage for this massive disparity would be no wrong.
Technically, an individual’s life cover should be strictly based on his/her life stage. What the calculations say is that an earning individual up to the age of 40 must consider purchasing a term plan with a life cover of approximately 20 times of the annual income. An individual in his/her 40s must consider buying a cover 10-20 times of the annual income, while an individual in his/her 50s should opt for a life cover 5-10 times of the annual income.
Apart from income, the expected expenses can also form the basis of an individual’s sum assured estimation. Ideally, the sum assured of your term insurance plan should be 12-15 times your dependent family’s annual expenses. At the same time, it is important to learn that the financial situation of every individual is distinct and unique, and the one-size-fits-all approach is never recommended when choosing a life insurance cover. It is always better to have a thorough analysis of one’s expenses, liabilities, investments and requirement while arriving at the ideal cover amount. A term insurance plan should always continue until your earning capacity.
Also, your life insurance cover should be only linked to your needs, requirements and expenses, and not to a figure like Rs 1 crore, that may seem big enough to you. Though the emotional stress cannot be compensated in case of the sudden death of the life assured, an adequate sum assured can certainly ensure that the dependents do not have to deal with any kind of financial stress.
(The author is Chief Business Officer-Life Insurance, Policybazaar.com)