When it comes to protection for your family, the need for life insurance holds the pride of place. There is hardly any individual without a life insurance product for meeting long term goals and in the process, secure your family from the uncertainties of life. As a corollary it follows that your coverage is unique, which may not match with any other.
In line with your preferences, your objectives, your financial resources, your liabilities and the size of your dependent family become crucial to obtain an ideal coverage. It is a fact of life also that along your journey, your priorities may change and even your resources may be altered. Accordingly, it is most natural that you buy a number of policies in alignment with your objectives and life goals during the journey.
Which Insurance Plan to buy?
The crux of the issue protecting your family necessitates your cover in various forms. In such a situation an insight into the basic types of insurance plans offered in India is of prime importance.
Term Insurance Plan
It is a pure risk plan where your insurer pays only the death benefit to your nominee on your death. In the absence of any frills, this plan provides you with a high sum assured against a very nominal premium. Even the psychological sum assured of Rs.1 crore is affordable; such is the flexibility of this plan.
Endowment Insurance Plan
A life cover is the basis of any insurance product. Bur providing savings feature ensures that you also end up with a survival benefit should you outlive the policy term. There are many variants of this plan like Money-Back and Whole Life adding value to your cover and enhancing the options available to you.
Nothing is better than a life cover embellished with superior yields from investments directed towards market instruments like Equity. Debt and Balanced Funds.
What makes Term Insurance Plan a Must?
Now that you are aware of the types of life insurance plans, it goes without saying that the first preference would be to buy a term insurance plan. Since it also allows you to bridge the psychological barrier of Rs.1 crore, it becomes incumbent upon you to buy one and use the savings you make on the premium for other life insurance plans as an overall cover for your other financial goals. Even then you may find, with changing life goals and your ageing, the cover initially envisaged is turning out to be inadequate. So how do you determine what your best life cover is?
Factors to determine your cover
Term Insurance promises to pay your nominee the death benefit on your demise, provided you have paid all the premiums to keep the policy alive. The quantum of the guaranteed amount is what you had chosen as the sum assured while buying, what you thought would suffice as protection. The determinants for the cover were:
- Your earnings : Whatever is your cover, the most important factor is your total income and the expenses that you have to cater for to maintain your family.
- Your Liabilities: Should you die with a slew of unpaid debts, your dependents will meet financial disaster in liquidating your liabilities. Your term insurance plan cover must compulsorily account for this outgo.
- Size of your Family: The number of dependents in your family is an important criterion, as you would probably wish to provide them with the same lifestyle as they are used to.
- Life Goals: The important factor of your children’s education and the wedding takes precedence over everything else. So you will have to focus on the future requirement relating to these life events.
- Financial Cushion: It is important to gauge the reserve fund you wish to leave for your family after meeting the day to day expenses. This cushion is intended to provide for emergencies that may arise.
- Your age and health: These two factors are important for your term insurance plan cover and this will determine the projected premium for the envisaged sum assured.
- Affordability: Howsoever much you may try to fix a life cover; it will come to bought if you cannot afford it. The idea is to buy one term insurance plan and use the savings on premium plus the additional sum required to protect your family after the term insurance plan expires.
How much Life cover is Required?
Having come this far, the crucial question that needs to be answered is, how much life cover is enough? There is no thumb rule for an absolute ideal sum assured. What is Important to be understood is that the cover is not constant and needs review periodically, preferably once every five years. Accordingly changes are required based on the review to revise the cover to be enough till the next. Some of the methods employed for calculating the ideal life cover are:
Human Life Value
It is an important measure provided by most online aggregates to help you decide on the best cover for you. It basically expresses your future potential income in current value terms after inflation rate adjustment. It asks for your age, income and the rate of return which in other words is the projected inflation to give you the present value of your potential income till you retire.
Another means of determining how much cover is enough is based on your age with income multiplier. This helps you to arrive at the cover in the ranges as under:
- Age group 30 to 40: The cover should be 15 to 20 times of your annual income.
- Age group 40 to 50: The cover should be 10 to 15 times of your annual income.
- Age group 50 to 60: The cover should be 5 to 10 times of your annual income.
The importance of Riders:
When enough cover is arrived at, value addition to it through suitable riders works to your benefit. Instead of paying a higher premium for the sum assured, it is wise to opt for critical illness and accidental disability rider, which turns out to be cheaper in the long run. The idea of having enough cover is that the term insurance plan protects your family from all eventualities that you could best project. After all, you are only trying to make life easy for your loved ones independent of your absence. A sufficient term insurance cover that provides the intended safety net is the best with enough life cover.