Nowadays, a large number of people are happy with the 1 Crore term insurance cover. At the same time, the result of buying a life insurance cover without measuring the financial status and premature death may cause the dependent's lives to be devastating. Well, it looks like a smart choice to get insurance cover at low premium rates. In reality, one receives such a large cover without getting a big hole in the pocket.Read more
Apart from this, the question arises, is the Rs.1 Crore Term Insurance cover is enough for you? Will this cover amount be sufficient to fulfill all your family’s requirements when you are not around? Let’s discuss in detail:
Nowadays, no particular reason is there to track this figure. It may be adequate in the case of one person and won’t be sufficient for another person. You can only estimate the cover or amount after considering your future liabilities and the life objectives planned for your loved ones. This is the reason it is important to purchase term insurance on the first go. What in case if home finances/ loans or other associated expenses such as child’s marriage, higher education, and spouse’s retirement requirements exceed this amount of coverage? In such situations, the ‘figure of benchmark’ will not work and fall short.
Several people would suggest you purchase term insurance that is 15 – 20X your yearly salary i.e., the simple thumb rule, but it is not the right formula to compute. The threshold amount can be Rs.50 lacs, Rs.1 Crore, or Rs.2 Crores. The amount of cover will differ from person to person depending on the individual’s income, dependant members, and financial and life objectives in the future. You can easily calculate the amount of term insurance using the following formula:
Term Insurance Cover Amount = [Lifelong expenses of family (annual expenses given inflation till the age of retirement) + Expenses of future objectives + Debts/Loan] – Savings
At the time of computing the amount of term insurance cover, it is important to consider the financial requirements of the family that will raise with time. For Instance, if Ram’s current expenses are Rs. Sixty Thousand per month in the year 2019, a minimal 8 percent of inflation will increase that number to Rs. Eighty thousand per month in five years. Then, after ten years, the household expenses (monthly) would increase up to a lakh or more than that. You require to aspect this increase in standard living expenses at the time of purchasing a term policy.
Outstanding loans, number of years your dependents require an income/salary i.e., monthly basis and other related expenses such as child’s education, marriage are also a very important factor to take into consideration that has strategically planned in coming years. Then, subtract your reserves from the whole amount and receive your term insurance coverage amount.
Let’s understand this with the help of an example of Raj and Kaval and check how much cover they need.
Raj has 2 children and also has a house finance/loan. He also has a 1 Crore Term insurance cover that might not be sufficient for him or his loved ones.
Age of Raj: 30 years
Age of Retirement: 60 yeas
Currently Family’s Annual Expenses: Rs. 3 lacs
Expenses of Family for the coming 30 years (along with inflation of 8 percent): 3 Cr.
House Loan: 50 lacs
Child’s Future Higher Education: 50 lacs
Total: 4 Crore (3 Crore + 50 lacs + 50 lacs)
PF + Personal Savings + Mutual Reserves/Funds: 50 Lacs
Life Insurance Coverage Required: 4 Crore – Rs. 50 lacs = 3 Crore 50 Lacs
Ram needs a term plan coverage of 3.5 Crore. His existing plan will fall 2.5 Crore short, which is a large difference. So, now he would require to evaluate and get a large SA for his loved ones to fulfill the future objectives and expenditures at the time of his unfortunate demise.
Let’s understand the case of Kaval, 25 years and is not married till now. A sum of 1 Cr. is quite enough for him.
Age of Kaval: 25 years
Yearly Salary: 6 lacs
Dependant Members – No
Home Loan: No
Personal Expenditures: 4 Lacs
Child’s education expenses: No
Present Term Insurance Coverage: 1 Crore
Needed Cover: No
Mutual Funds + Personal Savings: Rs.2 Lacs
Although Kaval does not need a term insurance plan right now, he is wise enough to purchase it at an early age. The premium amount is low and the amount of coverage will be large enough for Kaval for some years until he marries and has kids. As his liabilities increase, he can check his plan and increase the cover amount.
One of the easiest ways to receive a sufficient life insurance amount is by using a simple universal multiplication formula that requires two parameters: multiple factors and an annual salary. A multiplier factor is required so it would be more than 1, 2, 3 years’ earnings that would not come to the household if the sole earning member of the family died. The entire profits of the future will be impacted.
This multiplier factor also helps in keeping a check on future income flows based on the insured's current income, because it also considers what the insured would have earned in the future. As a thumb rule, one should always select multiple factors of 20 on the upper side and 15 on the lower part. This factor provides you with the right life cover amount.
So, if an individual has a yearly income of Rs.8 lacs, the ideal amount will be Rs.8 lacs X 20 = 1 Crore 60 lacs.
Home loans, childbirth, marriage, and other related events would increase the liabilities of an individual, and thus the financial liabilities also increase. So, it becomes imperative to assess the term covers every four to five-year interval. This will make sure that the term plan cover is enough to meet the family’s future needs in case of your absence.
If one is thinking to purchase a term plan and is confused that how much amount is enough for an individual. He/she should compute the coverage by following the basic formula above-mentioned and find an estimated coverage of term insurance that will fulfill the future requirements of his/her family instead of thoughtlessly following the 1 Crore Term insurance cover.
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