How Much Life Insurance Is Sufficient?
How Much Life Insurance Should You Plan For?
Life insurance is a must-have. It provides financial security to your family members, especially the ones who depend on you the most. You should also know how much life insurance coverage is sufficient for your needs.
There are many types of life insurance you can buy. This article will talk about “Term Insurance”, which is the simplest form of life insurance.
What is life insurance?
Life insurance is an agreement between an insurer (Insurance company) and a policyholder (you). In exchange for paying a premium (the insurance fee), you (the insured) will receive a financial payout in the event of your death.
It could be a great tool to safeguard your family’s economic security. If you are the primary breadwinner in the family, having enough life insurance coverage would mean that your dependents will be able to pay off debts related to home or education, etc., and take care of their housing needs after you’re gone.
What is Term Insurance?
Term Insurance is the simplest life insurance option. It covers your family’s financial well-being if you’re not around. Since there are no gimmicks involved premium will be lower as well.
Premiums: You will find online ads showing policies start from as low as 490rs per month. Term plans are affordable. Premium can be paid annually, half-yearly or quarterly.
Riders: You can add an additional monetary benefit for critical illness or for accidental death. Of course, a rider will add cost to the premium, but it might be worthwhile. Critical illness riders can be handy.
Tax Benefits: All life insurance premium payments are eligible for tax benefits under section 80C. Insurance payouts are tax-exempt.
Let’s move on to the more important part of how much life insurance you need.
How much life insurance do I need?
The answer to this question is going to be different for everyone depending on their requirements, but a few key factors will help you determine the amount for yourself.
– How much debt do you have? The more you owe in debt, the more your dependents will need from your life insurance policy. Your debt includes home loans, car loans, education loans, and credit card debt.
– How much income is required to maintain your current lifestyle? The more you invest now, the less life insurance you will need as it would be easier for your dependents to maintain the present standard of living on their own.
– Do you have small children or elderly parents who would need financial support if you weren’t around?
– How many people’s financial needs do you need to cover with your death benefit? The biggest challenge in choosing an amount of coverage is understanding your own financial responsibilities. You need to know how much life insurance you will need to provide for each person’s protection.
Ex. If you are single without any financial dependents – you only need enough life insurance to cover your own funeral expenses and outstanding debts.
How to calculate life insurance coverage?
Life insurance can be paid for using a single premium or regular premium. In the first case, you pay a sum of money upfront and receive a guaranteed death benefit.
In the second case, your policy will need you to pay a certain amount each month until it matures (i.e. reaches a specified maturity date). Your payment will determine how much coverage you will be eligible to receive.
Whatever option you choose, the amount of insurance coverage would depend on the following factors:
– Your current monthly income
– The number of monthly payments in your policy
– How much cover do you need
And if you have elderly parents or children who are financially dependent on you, factor them in too. The amount of coverage that you need should be determined based on your net worth and financial responsibilities.
Here’s a simple calculation:
Total all your liabilities. Check how much money will be needed to pay off the liabilities and then maintain the current lifestyle.
Ex. If you own an apartment and owe half the value to the bank, add your condo’s market value to your other assets (e.g. savings, mutual funds). Then add the amount that you need to pay off your outstanding loan to liabilities.
A good idea is to err on the side of caution and get more coverage than you need.
A thumb-rule: Your term insurance should be more than 10x of your annual salary
Who should consider getting life insurance?
Life insurance penetration in India is at 2.8% according to IRDAI. To state the obvious, many more people need Life Insurance than those currently opting for it.
This is especially true if you arel in the following categories:
– If you have parents, spouse, or children who are completely financially dependent on you
– If your family depends on your income and financial support to maintain their lifestyle
– If you plan on owning a home in future
That’s why; if you haven’t figured it out already, life insurance is something that everyone should own.
I’m a single young independent working professional. Do I need life insurance?
Yes, you do. Owning life insurance is a smart move for someone who is single and planning on owning a home soon. Since you’re single, your parents will be left with nothing if anything were to happen to you.
And even if you don’t have any dependents right now, that is likely to change. So owning a life insurance policy would help provide financial protection in the future. Unless you have a very ‘outlier’ life plan, you would need insurance.
I am 60+ and my kids are settled, do I still need insurance?
This one is a little more nuanced. It boils down to how well you have executed your financial plan. If you are going to leave behind an inheritance for your kids then maybe you don’t need insurance.
But if you can afford the premium then why not leave behind a tidy sum for your spouse and kids. Also, as you grow older it is harder to get life insurance coverage so you might as well get it now than later.
I don’t earn much as it is, do I still need to spend on insurance?
Yes, especially if you have dependents to take care of financially. Owning life insurance isn’t only useful for high earners. People with low income should also consider buying a life insurance policy as it provides them with financial protection against any potential risks. Insurance is not optional.
You can also read about the importance of term insurance in this post.
Where should I buy life insurance?
A leading aggregator for life insurance in India , Policy Bazaar, will give you plenty of options. You can go to their website and compare various policies according to your requirements.
Aggregators have come into existence to help us buy online term plans by comparing across many companies. They will typically have a guided system to help you identify the plan best suited for you.
Other aggregators to consider: Paybima, Policyx and Renewbuy I am sure there are others to consider.
Keep in mind though, you are looking for the most simple non-gimmicky insurance policy.
Also, look at the very basics as part of your journey in financial planning.
Top options for life insurance in India
A lot of people ask the following question – which is the best life insurance company in India? The answer to this is “it depends on your needs, budget, and what you’re looking for” (i.e. term policy or whole life). Here are the top 5 popular insurance providers you can choose from:
1. Max Life:
Max life was founded back in 2000 and after 21 years it has become India’s top life insurance provider. It is a combination of Max Financial Services (Indan) and Mitsui Sumitomo Insurance Company (Japanese). Its assets under management have crossed over 50,000 Crores. Also, it has a claim settlement ratio of 99.20%.
2. Tata AIA Life Insurance Company:
The Tata AIA Life Insurance Company provides a wide range of products. Amongst these are traditional insurance products, investment-linked products, and protection plans. It is the largest independent insurance group globally with a claim settlement ratio of 99.07%.
3. HDFC Life:
HDFC’s one of the largest private-sector financial services companies in India. It offers a wide range of insurance products – group, individual annuity, savings-linked insurance plans (SLIPs), and retirement solutions. HDFC Life is popular in India for its home loan protection product, which covers your outstanding home loan in case anything happens to you. It claims an over 99.04% settlement ratio.
4. ICICI Prudential:
ICICI Prudential as a brand is as old as ICICI Bank. The company has been providing life insurance and general insurance services for over two decades now. Its assets under management have crossed 1,600 Crores, which makes it one of the most trusted, valued, and sustainable insurance brands in India. Its current ratio is 99.58%.
5. Life Insurance Corporation of India:
The Life Insurance Corporation (LIC) is one of the oldest insurance companies in India. It was founded in 1956 under the LIC Act and operates as a public sector company that offers life and non-life insurance products. It has a massive operational presence in India and manages assets worth over Rs. 3,11,000 Crores. The current ratio of LIC is 97.79%.
Key Takeaways
- Life Insurance is necessary for everyone who has a family and/or dependents
- Understand your families financial needs in case of your passing
- List down your assets and liabilities. Calculate the amount your family will need to pay off all debts and then maintain their current lifestyle.
- Consider if you need any riders to be added to your life insurance policy, such as terminal illness or accidental death
- Think long and hard about your family and dependents and decide about life insurance needs
- You can buy insurance from one of the aggregators by comparing various options
- Look at some of the top companies in India which offer insurance and compare to see what suits you.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
