Ideally, sum assured should be 12-15 times of your dependent family’s annual expenses

When Sunil Thakur — a 28-year-old Bengaluru-based IT professional — bought a term insurance cover of ₹1 crore in 2016, he was single and had no dependents.

Now married and father of a one-year-old girl, Sunil strongly feels that his ₹1-crore term plan may not be sufficient to sustain his family’s needs and cover his life goals 15-20 years down the line.

He believes that his professional and personal lives were only beginning and both his income and expenses will rise significantly in the next couple of years. And to cover the loss that may include Sunil’s sudden death, perhaps a cover with higher sum assured might be required. The sad part is that people who think and calculate like Sunil are very few. To most policyholders, the ₹1 crore amount seems huge. They believe the cover is sufficient to take care of all their financial needs in case something unfortunate happens to them.

With the ₹1 crore cover being a popular term, most people seem to be mentally comfortable with the amount even without doing the basic math.

How most people come to the conclusion that ₹1 crore cover is enough, is by calculating that if the family deposits ₹1 crore in a bank account that earns 7% interest, it will fetch them a monthly income of ₹58,333. To them, the amount is enough to sustain the expenses of an average middle-class Indian household.

Though this calculation may seem ‘legit’ on paper, it won’t work when you take into consideration many factors such as outstanding loans in the name of policyholder, one-time expenses like education and marriage of kids, the relentless march of inflation, the everyday financial needs of the family and retirement needs of the spouse.

Calculations of most industry experts suggest that if the policyholder has a loan and is also parent to two kids, the ₹1 crore received on the death of the policyholder will not sustain the family for more than 10-12 years. Unfortunately, most Indians buying life insurance policy are under-insured!

No doubt, despite the demand for pure protection term plans having increased considerably in the last few years, the disparity in life protection in India is still as high as 92%. Attributing low awareness around adequate coverage for this massive disparity would not be wrong.

Technically, an individual’s life cover should be strictly based on his/her stage of life.

What the calculations say is that an earning individual up to the age of 40 must consider purchasing a term plan with a life cover of up to 15-20 times of the annual income. An individual in his/her 40s must consider buying a cover up to 10-20 times of the annual income, while an individual in his/her 50s should opt for a life cover 5-10 times of the annual income.

The average salary considered here is ₹10 lakh per annum.

Apart from income, the expected expenses can also form the basis of an individual’s sum assured estimation. Ideally, the sum assured of your term insurance plan should be 12-15 times your dependent family’s annual expenses.

At the same time, it is important to learn that the financial situation of every individual is distinct and unique, and the one-size-fits-all approach is never recommended when choosing life insurance cover.

It is always better to have a thorough analysis of one’s expenses, liabilities, investments and requirement while arriving at the ideal cover amount.

A term insurance plan should always continue till your earning capacity persists.

Also, your life insurance cover should be linked only to your needs, requirements and expenses and not to a figure like ₹1 crore. Though the emotional stress cannot be compensated for in case of sudden death of the life assured, adequate sum assured can certainly ensure that dependents do not have to deal with financial stress.

Increasing sum assured

People even have the option of choosing term plans with the feature of increasing sum assured. Under increasing term insurance plans, the sum assured keeps increasing every year by a specific amount. For the first five years, the death benefit remains at the same level. The sum assured then starts to rise by 5-10% for the next 15 years or till end of policy term, whichever is earlier.

All such plans let you increase your term cover by using the increasing sum assured option with the same insurer, thus taking care of the increasing expenses of your family.