It has become a general perception that buying a term life insurance policy for Rs 1 crore is adequate. But, is that enough?
A term insurance plan is the purest form of life insurance. Getting a high cover at a less premium is possible only if you opt for a pure term insurance plan over any traditional insurance policy such as endowment or money back. But, if you are looking to buy a term insurance plan, keeping the right amount of life cover is equally important. Irrespective of the age and other requirements, many of us typically go with term insurance for Rs 1 crore. Even while calculating the premium using the term insurance premium calculator, the sum assured is generally kept at Rs 1 crore. It has become a general perception that buying a term life insurance policy for Rs 1 crore is adequate. But, is that enough? Let us find out.
Life insurance primarily works as an income replacement tool that is aimed to ensure that the standard of living of the surviving family members does not suffer in the absence of the earning member. Additionally, if there are financial liabilities or goals such as home loan, children financial needs etc, they are taken care of through life cover. One needs to properly estimate while buying term insurance as to how much to buy.
That means, arriving at the right amount of life cover needs a more evolved approach and should not be based on thumb rule or guess estimates. “Life insurance offers a range of products to help achieve your financial goals – protection against uncertainties, paying off debts, child’s education, retirement, etc. It is essential to identify your needs and calculate an adequate amount of coverage for the same. Also, at different life stages, your family’s needs differ. Rising inflation can have effects on an individual’s consumption and their standard of living. Hence, it is essential that the future value of money should be considered for calculation when determining adequate coverage,” says Satishwar Balakrishnan, CFO, Aegon Life.
Some may use the thumb rule while fixing the amount of life cover. As a thumb rule, one may buy cover equal to at least 10 times of one’s annual take-home pay. This can be a decent start wherein the amount for long term liabilities may be added to arrive at the final figure. Alternatively, some use the expense-method to arrive at the actual amount. Under it, if the amount of life cover will depend on one’s household budget post the death of the earning member.
By following the thumb rule, for someone with a net annual salary of Rs 10 lakh, the amount of life cover comes to about Rs 1 crore. Will this be sufficient to meet family household needs? Now, that will depend on the individual’s age and the tenure for which family would require funds to sustain their living.
By investing the death benefit of Rs 10 crore in a bank fixed deposit, the annual returns could be about Rs 7 lakh, assuming the rate of interest of 7 per cent per annum. Further, there could be other financial goals that may still be required to be met.
“Every individual and family’s needs are unique. If the only dependent is spouse, for instance, a term cover of Rs 1 crore may be sufficient. If two children are dependents as well, it is possible that a larger sum may be required. Buyers should take a milestone-based approach for buying the right cover.” says Balakrishnan.