Do you require term insurance? That answer is a resounding yes, particularly since the outbreak of the Covid-19 pandemic. The pandemic has shown us how life can truly be uncertain and unpredictable. It is important to remember that your family will require financial support in case you are not around in the future.
However, just buying any term insurance is not the be-all and end-all of the process. You should ensure that you choose the right coverage amount to cover your family’s needs. How do you do this? Let’s find out.
Is Rs 1 crore term plan sufficient?
While you can always use a term plan calculator to work out the coverage you require, many do not put in the effort needed for this purpose. The wrong notion often misguides them that a Rs 1 crore plan will be sufficient for taking care of their family’s future needs in case they are no longer around. However, is that enough?
Life coverage is not a one-size-fits-all proposition; every household or family has different goals to be met in the future and varying standards of living. Hence, there can be no single amount that can be called sufficient. Secondly, you must factor inflation into the equation. The purchasing power of money, as we know it, will keep diminishing over the years.
Assuming a 5% inflation rate, the value of Rs 1 crore after 15 years will be around Rs 48 lakh! And when the time horizon gets longer, the value decreases even more. Assuming a 5% inflation rate, the value of one crore after 20, 25, and 30 years will be approximately Rs 37.68 lakh, Rs 29.53 lakh, and Rs 23.13 lakh, respectively.
Let’s say out of your current annual income of Rs. 8 Lakhs, around Rs. 6 lakhs go towards your family’s expenses. Considering you have 25 years left in service, and your income is expected to increase by 10% every year, you will require around Rs. 2 crores to cover your family’s expenses. A term plan calculator that takes inflation into account can determine this for you. Your Rs. 1 crore life cover will only be half of what is required. Hence, what you consider sufficient today may be grossly insufficient tomorrow!
How to calculate the suitable coverage amount that you require
There are several ways to find out the coverage that you need. You can use any one of the following methods for calculating suitable term insurance coverage-
- Human Life Value (HLV) – This considers any individual’s economic value towards their family. This considers future income value, liabilities, expenditures, and investments. You will have to calculate the income, expenditure, expected financial responsibilities in the future, and other objectives, keeping inflation in mind.
- Income Replacement Method – This approach assumes that the life insurance coverage should compensate for the income loss to the family due to the policyholder’s demise. You can use this formula for calculations:
Current yearly Income x Years left till your retirement
Suppose you are already 45 years of age and you earn Rs. 20 lakh per year. Then, if you are retiring at 60, you will require coverage of at least Rs. 3 crore (Rs. 20 lakh x 15 years).
- Expenses-Oriented Method – Experts highly recommend this approach. It considers life insurance coverage as a replacement for the future expenditures of the family. First, calculate monthly expenses, loan repayments, and future goals. Then subtract the current value of your life insurance coverage and investments. The final amount will give you an idea of the coverage that you require. However, this method should also consider inflation over a certain number of years.
- Underwriter’s Calculation – This method can also determine your term insurance coverage. Just take a commonly used thumb rule for underwriters- a sum assured that is ten times your annual earnings. Hence, if you earn Rs. 20 lakh per year, you will need at least Rs. 2 crores as your life coverage.
If your present coverage seems insufficient due to evolving future objectives or other reasons, check out ways and means to scale up the same. You can also enhance your coverage (if applicable under your current plan) or buy a new term insurance policy altogether. Many insurance companies offer options for boosting coverage at various stages in life. Coverage enhancement features help increase the sum assured as per your requirements. However, this may lead to premium increases alongside. Therefore, you should always compare premium amounts and then choose coverage likewise. Before finalizing, remember that you can always ask for expert guidance to avoid taking on insufficient coverage.
