Know how much insurance cover you need
By ET Bureau
How much is your life worth? It’s a morbid question, but one that must be answered when you go shopping for life insurance. The foremost objective of life insurance is to provide financial support to your family and dependants if something untoward happens to you. The cover should be big enough to settle all outstanding dues as well as generate an income for the family of the insured person.
Use the worksheets given below to know how much insurance you need. We reckon that for the average ET Wealth reader, the answer would be anywhere between Rs 75 lakh and Rs 1.5 crore. This is not an overestimation, but the bare minimum your family will need to maintain the current lifestyle.
Adequate life cover won’t cost the earth if you buy the right type of policy. Traditional plans offer a smaller cover because they are esstially investment vehicles. At the age of 30-35, a person will be required to pay a premium of almost Rs 8-10 lakh a year for a cover of Rs 1 crore. Only the super rich will be able to afford such a plan. For the average buyer, a better option is a pure protection term plan which can offer the same cover for Rs 10,600-12,600 a year.
The term of the policy is equally important. A cover that ends when you are in your 50s won’t be of much help when you would need it most. Buying a new plan at that age is very costly. Take a plan that extends till the end of your working life.
In the past 2-3 years, almost all private insurance companies have launched online term plans. They are easy to understand, convenient and far cheaper than the offline versions that require an intermediary. The premiums of online term plans are so incredibly low that some people fear there is a catch. There is no reason to doubt the policy, as long as you have honestly submitted correct information.
Don’t deny if you use tobacco, consume alcohol or are employed in a hazardous industry. Also, if you or any blood relative has suffered from an illness, disclose details of the ailment. These are material facts that impact your risk profile. The claim can be rejected if these aren’t disclosed at the time of application.
Agents try and paint a different picture because they lose business when a customer buys directly from the company. But online customers receive the same quality of service from the insurance company as any other client. When a claim is processed, there is no differentiation between a policy bought online and one purchased through an agent. Besides, all insurance companies have to comply with the rules laid down by the insurance regulator, Irda.
Buying a policy online also means you have to be alert when it comes up for renewal. With no agent involved, nobody will badger you to pay future premiums. The grace period of some plans is also very short (15 days). You can avoid missing the premium by automating the payment. Give an ECS mandate to your bank to pay the premium. You just need to ensure that there is sufficient balance in your account when the payment is due.
A pure protection term plan should form the base of your insurance portfolio. Once that is in place, you can consider buying a Ulip or a traditional plan. You can invest in stocks through a Ulip, but they are costlier than mutual funds and have a longer lock-in period.
Traditional plans are debt based but offer low returns of 6-6.5 per cent. These are suited to high-net worth individuals for whom the tax benefits offered on life insurance policies are an important concern.
4 steps to calculate your life insurance needs
STEP 1: KNOW YOUR FAMILY INCOME/EXPENSES
STEP 2: KNOW YOUR FAMILY’S ONE-TIME NEEDS
STEP 3: KNOW YOUR CURRENT ASSETS
STEP 4: YOUR CALCULATION
Four circumstances when you don’t need insurance
1. You don’t have dependants
If you are not married and nobody depends on your income, you don’t need life insurance.
2. You have enough assets
If you have already built assets that can take care of your family in your absence, there’s no need to spend on life cover.
3. Your spouse earns well
If your spouse has a good income and can sustain on it, then you need not pour money into life insurance.
4. You have retired
Insurance is meant to replace the income of an individual. So a retired person does not need cover, unless he has liabilities that extend into retirement.
Five reasons you need to increase insurance cover
1. Your parents retire
Take additional insurance when your dependent parent(s) stop working or their income reduces due to any reason.
2. You get married
Even if your spouse works, he or she might be dependent on financial support from you. So increase your cover accordingly.
3. You become a parent
Your responsibilities shoot up after the birth of a child. Take an insurance cover to provide for the new family member.
4. You take a big loan
Your family will be in a spot if something happens to you and there’s not enough money to pay the EMIs. Take a cover equal to the loan amount.
5. You start a business
If you quit your job, you will need a bigger cover because you might have lost many of the benefits that employees are entitled to in the organised sector.