For a family with an annual income of $15 lakh, life cover $1 crore (for the primary breadwinner) will last for approximately 8.5 to 9 years, assuming the family needs the entire amount. $15 lakh every year and the remaining amount is invested conservatively.
On an expense basis only – accounting only for basic household expenses along with major costs such as school fees and medical expenses – $A one-crore group may last longer, about 13 years.
If left to chance, you may end up protecting your family financially for only a fraction of the time you intended. Depending on the age of your dependents, they may need to replace income for 15-20 years or more in the event of your early death.
Therefore, life insurance cover that lasts for only 10 to 12 years is unlikely to be sufficient.
“The financial risk covered by term insurance is the loss of the potential for future earnings. When deciding on the term of the policy, it should directly reflect the active working age of the breadwinner.
Structurally, the sum assured should serve as an alternative retirement for your dependents, continuing until they become financially independent or no longer require support.
But how much is enough? Insurers’ eligibility criteria generally state that life coverage is 10 to 15 times annual income. Thus, for someone who earns $1-2 lakh per month, lifetime cover $1-3 crores may seem reasonable.
However, this is just a general rule and does not take into account a family’s specific financial circumstances. For a family of four with a home loan and a car loan, this cover may be inappropriate. On the contrary, for a family with one minor child, there is no debt and investment securities $5 crores, may be enough. The insurance cover you choose should reflect your family’s individual requirements.
Estimating the life cover required is only the first step. You should then consider the type of policy, insurance company, and passengers you would like to add.
Here’s a guide to improving your family’s protection plan.
Start with the outstanding loan principal. Then calculate your monthly non-negotiable expenses, calculate them annually, and add one-time annual expenses such as school fees, medical expenses, and other essential costs.
Finally, include major financial goals such as higher education for your children and marriage expenses.
“Clients come to us for comprehensive financial planning and this step is key, and cannot be skipped. Ideally, the life insurance cover you need is the amount that covers any outstanding liabilities, needs of all dependents and the value of any visible and important goals (till retirement). An assessment of the current lifestyle is done to ascertain a rough figure for future goals. In addition, the medical history of the individual being covered is also taken into consideration as a risk factor,” said Nisha Sanghavi, CFP and Director, Promore Fintech.
If you already have life coverage through another insurance company, employer, or credit card, reduce your required coverage by that amount.
The insurance market is full of investment-linked plans, savings protection plans, and premium return policies.
None of these are necessary if your goal is simply to protect your family’s finances in the event of your death. What you need is a clear term insurance policy. to $A cover of Rs 1 lakh, an endowment plan with guaranteed return, savings and protection may cost a person of around 40 years of age. $10 lakh annually in premiums.
A pure term insurance policy offering the same coverage would cost approx $15,000 per year.
Over 20 years, an endowment plan can cost 30-35 times more (Table 1).
“Term life insurance is a pure protection product, making it the single most cost-effective mechanism for hedging against the financial impact of premature death,” Ramani said. “Its primary advantage lies in sheer pricing efficiency. In contrast, savings protection plans attempt to achieve two conflicting financial objectives simultaneously: investment growth and risk coverage. Since a portion of the premium must support the investment pool, the cost of a similar amount guaranteed in a pooled plan is substantially higher.”
Once you have decided on the coverage amount and policy type, compare insurance companies carefully.
While the claims settlement ratio is important, experts recommend looking beyond the overall average and examining individual death claims settlement ratios, both by the number of claims settled and by the value of claims paid.
A higher settlement ratio by value indicates that larger claims are not routinely denied. The time required to settle a claim is also relevant.
These numbers are available on insurance company websites and comparison portals like Policybazaar.com.
Also examine the insurer’s solvency ratio, available in its annual report, and its 13-month continuity ratio, which indicates the proportion of customers who continue their policies after one year and serves as a measure of the suitability of the policies being sold.
The stated reasons for denying a claim are also worth analyzing.
Together, these indicators provide a better picture of an insurer’s long-term reliability.
The final step is to decide whether or not you want to add riders to the basic policy. Riders provide optional additional coverage for specific risks, while the basic policy covers death.
Some riders also offer benefits if the policyholder has a serious illness or disability. Critical illness, accidental death benefits, and premium waivers are among the most common riders recommended by experts. As riders increase premiums, the decision should be based on your family’s specific needs.
Once you have determined your coverage amount and riders, you may also consider splitting coverage between two insurance companies to reduce reliance on one company.
Life is uncertain. Therefore, protecting your family from financial difficulties in your absence is essential. Make sure you have enough life coverage as you continue to build your portfolio (Table 2). Both are essential pillars of sound financial planning.
Lisa Pallavi Barbora is a freelance writer and author of Money & Her
