Term insurance plans are the purest form of life insurance plan. These are the contracts that you can enter with insurance companies by paying a fixed premium at regular intervals over a specified tenure. During this period, if something happens to you, your family will receive financial assistance from the company. Your loved ones can continue to maintain the same standard of living. Term plans are also looked at as a form of investment.
In recent years, the sum of INR 1 crore has been associated with term insurance a lot, so much so that the sum is believed to be the perfectly adequate sum for term plans. The fact that term plans offer such a big sum at small amounts of premiums adds to their popularity. Even insurance premium calculators generally keep the maturity value 1 crore. However, we don’t know if it’s enough to cover up all the expenses of your family, do we? So let’s find out.
Is it Right to Have INR 1 Crore as a Benchmark Figure?
The term plan you should opt for depends on your financial needs, liabilities, and future plans. It depends on the number of dependents you have, on the assets you possess as well as on the investments you undertake. Therefore, it cannot be asserted for sure whether INR 1 crore is sufficient for a person or not. In the same way, a common premium amount for all cannot be declared.
Some use the thumb rule to find out maturity value for term insurance. It should be equal to at least 7-10 times of your annual income. Let us consider that you earn INR 10 lakhs a year. If you have only your parents to support, 1 crore (ten times 10 lakhs) may suffice you. However, if you have an educational loan to repay, credit card EMIs to pay back, a flat on lease, and parents to support, INR 1 crore is not enough. Therefore, the credibility of the thumb rule stands questioned.
In this situation, the expense method offers a better assessment. It is done by calculating the family’s expenditure after the person earning for the family passes away. Assets, liabilities, and investments are taken into account. Also, we make space for inflation.
What Should be Your Term Insurance Cover?
As mentioned earlier, each person’s insurance cover differs with their needs. We usually calculate it by taking an estimate of the expenditure, including expenses on future goals (such as your child’s education and marriage). Inflation has to be taken into consideration to reach a rough but accurate number. Also, you don’t want to pass on your debts to your family therefore each loan, EMI, etc. has to be accounted for. To come up with an estimate, we need to guess the number of years your family will need you to pay for them. For simplicity purposes, we take it to be until your retirement. Savings are deducted from the final amount to come to the term plan cover.
A simple formula can be used –
Term Insurance Coverage Amount = Family’s lifelong expenses (Annual expenses taking inflation into account till your retirement age) + expenses on future goals + loans/debts – savings
Let us look at two examples to understand this better.
Amita and Tanishq are two friends. Both of them are 30 and earn INR 6 lakhs per annum. However, Tanishq’s parents are retired. He is the sole bread-earner of the family who also funds his younger brother’s education. On the other hand, Amita doesn’t have anyone dependent on her.
Tanishq’s Expenses –
|Current Age||30 years|
|Retirement Age||60 years|
|Current Family Expenses (per annum)||INR 4 lakh|
|Total Family Expenses in the Next Thirty Years (at 8% rate of inflation)||INR 4 crore|
|Brother’s Future Education||INR 50 lakh|
|Total Expenses||INR 4.5 crore|
|Total Savings (Saving accounts + Mutual funds)||INR 1 crore|
|Required Cover Value||INR 3.5 crore|
Amita’s Expenses –
|Current Age||30 years|
|Retirement Age||60 years|
|Current Personal Expenses||INR 3 lakh|
|Insurance Cover Value Needed||Nil|
|Total Savings (Savings accounts + Mutual funds)||INR 1.5 crore|
In the above example, a term plan of INR 1 crore would not suffice Tanishq but would be enough for Amita. In fact, Amita does not need one right now. However, as they say for insurance, better to be five years too early than five minutes too late.
Always Review Your Term Insurance at Five Year Intervals
With each milestone in your life, your standard of living changes, be it a promotion, marriage, a child, or a new home. Therefore, it is a must to review your term insurance from time to time and enhance the cover accordingly. This is especially true for youngsters who have more and more coming for them each year. You don’t need the same insurance cover at the age of 25 as you would at 40. Therefore, upgrade your term plan from time to time to ensure your family’s well-being even if you aren’t here with them.
In this article, we primarily assessed the worth of term insurances guaranteeing INR 1 crore on maturity. In usual situations, it would not be sufficient. You must use the expense method to find out the cover amount suitable for you and your family.
However, a health cover of INR 1 crore will be more than enough in most of the cases. If it doesn’t cover the cost of treatment abroad, it may even not be worth your money. I personally won’t recommend it unless you have a history of illnesses in your family. Lower base plans with top-ups are a better option for middle-class Indians.