How much life insurance do you really need?

Santosh Agarwal

Is Rs 1 crore life cover enough? Insurance is no doubt one of the most reliable and trusted financial tools to protect you and your valuables from any unforeseen circumstances. However, have you ever wondered how much sum insured – particularly in life insurance – is actually sufficient for you and your family? Having a life insurance is important in life but staying adequately insured is most important. It is important for you to calculate how much sum insured would be sufficient for you only as an individual but as a consumer too keeping mind that you may have dependent family members.

Is Rs 1 crore sum insured really enough?

It is often observed that to most policy seekers in India, Rs 1 crore sum insured seems significantly large and enough to take care of all their financial expenses. To them, the amount is even sufficient to sustain their family’s needs and requirements in case something untoward happens to the policyholder. For many, Rs 1 crore remains a popular number and they are mentally comfortable buying a policy with the stated sum insured. This is when they fail to understand the essential logics and do the basic math. However, the fact is that relying on any such random numbers or rule of thumb can prove to be very dangerous. No doubt, the eight digit figure sum insured seems very large and enough as Rs 1 crore deposited in a bank account gives Rs 58,333 monthly income at 7% rate of interest. The money may seem sufficient to sustain the necessary expenses of a middle class family.

However, there is a flip side to the story. The calculation may seem perfect on paper but when it comes to implementation, the things change drastically. People often forget to take into account the outstanding loans on the name of the policyholder, the significantly increasing inflation, and most importantly, one-time expenses like children’s higher education and marriage and of course, the retirement needs of the partner. Before buying a life insurance, it is important for you to answer many questions like how will the money be utilised by the dependents on sudden death of the policyholder, how will the dependents generate regular income to replace your monthly income and how will the children’s future expenses and needs like education and marriage will be taken care of.

Calculating the right sum insured

As per industry insiders, the value of total sum insured must be completely based on the life stage of the policy seeker. Every salaried individual up to the age of 40 years must always have a cover of approximately 20 times the annual income. Individuals above the age of 40 years must buy a cover 10 - 20 times of the annual income while individuals in their 50s must opt for a cover of 5 - 10 times of their annual income. Apart from the annual income, your family’s annual expenses are also a great way to calculate the right sum insured for your policy. As per experts, your term cover must be at least 12 - 15 times of your family’s annual expenses. However, one-size-fits all approach cannot be followed while taking a life insurance and it is recommend doing a thorough analysis of individual expenses, liabilities, investments and requirements.

Securing the future of your spouse

When looking for a comprehensive life insurance plan, do make sure to choose a plan that adequately cover’s your spouse’s future. Your chosen insurance plan must be well equipped to protect your partner’s old age requirements so that she/he can live a life of dignity and comfort in your absence. Some of the major elements that you need to consider include living expenses, medical expenses and help-related expenses. While Rs 1 crore cover is sufficient if the only dependent is spouse, people who also have two or more children as dependents would require a larger sum insured.

Keeping pace with inflation

You must never forget inflation when calculating your family’s future costs and expenses. No doubt the needs and requirements of your family will keep rising with time and if today, your family’s total expenses are Rs 50,000 they are sure to rise to 70,000 a month in the next five years with an inflation rate of 7% PA. This is one of the most important reasons why you must consider total sum insured by buying a life insurance plan. It is always advised to review the insurance cover in every five years and majorly during few critical milestones in life such as marriage, buying a new home, birth of child and a lot more. To help the consumers, most insurers have an in-built feature like increasing the total sum assured or life-stage linked enhancement. Under these plans, you can easily enhance your policies and the sum assured to give a better and bright future to your family.