The figure of ₹1 Crore has a psychological attraction to it for us Indians. And this does get extended to life insurance too when people look for term insurance plans.
The most popular term plans are of ₹1 crore.
But while ₹1 crore is still a big amount in India for most people, an insurance cover of the same size may not be enough for everyone. Why? Because every individual’s situation is different and hence, demands different sizes of the so-called ‘right insurance amount’.
What is the right insurance amount then?
Let me compare two friends here to first highlight why the insurance amount differs from one person to another.
The first person is a 35-year-old male, who is the single earner of a family with a wife, 1 kid and 2 dependent parents. His friend is a 34-year-old unmarried with parents who are financially well off.
Obviously, the first person has more financial responsibilities riding on his shoulders. Isn’t it?
The first one has to plan his insurance in such a way that in his absence, the goals like children’s schooling, their higher education, their marriage, regular income for the family and medical contingencies buffer for parents, are financially well provided for.
The second friend on the other hand has no dependents as of now.
So, you see how their insurance needs differ.
What is the right term insurance cover for You?
Here is how you should think about answering this question in plain English.
List down the amount you think is needed to -
- Close all your outstanding loans
- Provide for a house (if not already purchased)
- Provide for your children’s remaining schooling years
- Provide for your children’s higher education
- Provide for your children’s marriage expenses
- Provide for the family’s regular day-to-day expenses for 15-20 years or till your children start earning
- Provide for uninsured medical expenses (as a buffer to health insurance)
Now if you sum the above numbers, this will give you your gross life insurance requirement. You can then deduct any savings that you already have, to arrive at the net insurance requirement.
Let’s take an example here to bring home the point that ₹1 Cr may not be enough insurance coverage for all.
Using the above logic, here is what the first friend (in the previous example) needs to have money to –
- Close all outstanding loans ( ₹10 lakh car loan)
- Provide for a house ( ₹75 lakh)
- Provide for child’s remaining schooling years ( ₹20 lakh)
- Provide for child’s higher education ( ₹30 lakh)
- Provide for child’s marriage expenses ( ₹10 lakh)
- Provide for family’s regular day-to-day expenses for 15-20 years ( ₹1.5 Cr)
- Provide for uninsured medical expenses ( ₹10 lakh)
This totals to about ₹3 crore.
Now you see why if this person just had ₹1 crore, he will be grossly underinsured. And in my view, if you are underinsured, then you are committing a criminal mistake towards your family. They deserve better. Isn’t it?
You should hope for the best but you should still prepare for the worst.
So, my suggestion is to do this exercise for yourself too. And if you find that your current life cover is not sufficient, then buy a term plan of an appropriate amount as soon as you can. And no matter what you are told (by others or those selling something), always buy simple term life insurance plans to cover your life. Do not buy traditional endowment, moneyback or Ulips plans.
And while you should periodically review the adequateness of your life insurance coverage, there are a few events when you should definitely do it. And these are when you get married, when you become a parent for the first time and the second time, and when you take out a home loan. These are key life events when your insurance requirements will change substantially.
Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.