How much insurance cover – Sum Assured do I require?
The only reason of being the most superior creature on this earth is our developed brain and rational ability, which give us vision and anxiety to worry for our future. Everyone always wants to protect his/her loved ones because he/she wants to give all the happiness to them. As the leader of family you want to give them all the things which you never availed or you never had. But when you think even for a fraction of second that what will happen if you are not with them, will they be able to maintain the same standard of living? Will your kids be able to go to the same school or college, and most importantly will they be able to live their life as you dreamt of? With all these questions in mind you decide to buy an Insurance policy to cover your family from the risk of premature death. You start searching different sites with same information, you call some agents or representatives of insurers to suggest you some plans and options. Do you really get the information you are looking for your family as the main beneficiary of your insurance policy is your family. Then you decide from all the menus and choose one, sometimes you decide on kickbacks, does it really help?
The most valuable question is could you protect your family properly? Could you decide how much sum assured you need for your family, which can really help them when you are not with them? For proper coverage you must know yourself first, and then you should contact your agent or insurer to help. First you must know what are you actually looking for?
Exactly how much cover do your family need on you, do you want an ENDOWMENT PLAN (which has maturity value), MONEY BACK PLAN (gives you a portion of sum assured periodically), ULIP (combination of market linked investment and step term plan) or you want a TERM PLAN (has risk cover only and doesn’t have any maturity value)?
As we believe nothing can be planned in isolation, our life is a portfolio or basket of many things, so we need to discuss it with some domains of your life. You need to ask a few questions to you.
How much financial responsibility do you have?
It is clear that it’s not easy to answer these questions, you need to think about yourself and your family. At least you should dedicate some hours for brainstorming session as you do for your employer/company. With the answers of these questions, you must know that insurance is not for profit, status symbol, obligation to buy from your people. Insurance is a pool of funds which gives your family a security for the amount for which you have paid the premium. Insurance is to indemnify the family. Let’s discuss some options with the help of these questions.
Why do we need insurance?
You must have thought some mile stones in your life – to achieve, which includes a certain amount of wealth at a certain age, where your family will be secured and to protect your family till the time you reach there, you should bear the cost of insurance, since it is not a fancy thing to do.
How much do you actually earn for your family?
You may earn much or low, it matters only from the insurer’s point to give you the risk cover, but the main thing is how much you actually keep for your family, after all your personal, professional expenses and taxes. How much do you actually spend every month for your family and how much do you save for them? This is the actual amount they will lose in your absence.
How much do you save annually?
This is important to know how much premium for your insurance can be affordable. In the early stage of your career if you have your own family and the risk is highest you can not afford high premium but you should always go for high sum assured. At a later stage when your savings are high and risk is low on your family you may not need Life Insurance as you might have sufficient wealth or you might have achieved many of the milestones of your life. Your savings should not be the criterion to decide the risk cover or insurance policy as it is happening these days.
Are you disciplined for investments or you spend everything?
You must know about this as there is a big difference between savings and investments. Saving is the first step towards investments but by investing your money, you actually allow your money to work for you, which gives you passive income in long run. You need to be disciplined to create wealth, if you are disciplined and you can take care of your investments, you should try to do it on your own in other asset class as this may give you lower returns than benchmark of assets. But if you struggle to be disciplined, you can take this route as these are forced savings and these can be useful in accumulation of funds in long run as you pay the premium annually for some years.
How much return do you generate on your investments on your own?
If you are able to generate returns after adjustment of tax and inflation, you may continue with the same as all the insurance policies have high administrative and distribution costs, which result in lower returns. If you save your money and you tend to spend the money in weekends at shopping malls, you should go for investments in insurance to protect the savings at least. As in these policies you would be able to withdraw your funds after some years only, at maturity.
Is your income regular or you foresee uncertainty in your cash flows?
You should spare some time to visualize the business cycle of your profession. There are businesses which generate cash flows once a year or you may be in job which gives you monthly income. This doesn’t affect the amount of cover on your life but it suggests you the mode of premium payment. There are different options
There can be some difference in the total annual premium because of the mode, but you should choose the mode on the basis of your cash flows because the most important thing is to maintain the risk cover of your life. If your profession is too uncertain, you should go for single premium plan, which gives you freedom from the regular payments but it may takes a large amount out of your pocket.
How much loan do you have?
What is your net worth after deducting liabilities from your assets? As if you have loans, this will increase the requirement of risk cover. As you would not like your loved ones to be disturbed for the legacy of loan left by you. The amount of loan would be added in your total requirement of risk cover.
For how many years are you visualizing the risk from pre mature death?
In how many years your family will have the assets to become self sufficient. These are the years in which you have the highest amount of risk on your life. Many people say, they need insurance to leave money after their death to leave legacy, but insurance is for the years in which your family is not ready to be caught unprotected. One should buy life insurance till the time he will retire or his responsibilities are there, at max. More over at later stage of your life you need less risk coverage as most of your responsibilities are over by that age, you have low loans or nil loans on you but at that time your premium per thousand is high on your life.
Is there any financial risk, if you are not with them?
If you are fortunate to have passive income as rent, good regular income from investments or assets to back your family in case of eventuality, you may not need risk cover from insurers. But you should always check that these incomes should not be dependent on you and if you are not there, income should not be affected. One most important thing you should always know, that your family members must know about these assets.
How much financial responsibility do you have?
This is certainly going to increase your risk cover. You should carefully ascertain the amount of responsibility you have in future and you should calculate in terms of purchasing power of money. So that your loved ones may have the desired life. You may also take the help of Financial Planners or online financial planning modules to ascertain the need in future. A Financial Planner will assist you in identifying, analysing and evaluating your risks. For the purpose of calculation you can use the future value function of Microsoft Excel also. Now you are ready with your home work to deal with representatives of insurers to buy your calculated and carefully thought risk cover for your family.
Impact of Life insurance on your life
Comprehensive financial planning is the ultimate solution. If one buys policies with high premiums with maturity value, one chooses an asset class that yields less than Inflation. In long run this habit of just accumulating your savings, result in low purchasing power and it compels you to postpone your other goals in life or you may not be able to fulfil your goals in the desired manner. On the other hand you need proper risk cover for your family to protect their future. If you have planned your protection cover efficiently, it gives you a different kind of confidence and a sense of fulfilment as you know that you have declared everything to the insurer and insurer has committed to secure your family with the proper coverage in your absence. Since it is a personalised thing that how much insurance you need we strongly suggest you to consult your financial planner for your assessment of risk coverage.
One should consider buying term plan only as it has the lowest premium. This allows you to consider other investments with the money you save.
Impact of time
You buy life insurance policy to cover the risk of uncertainty, so whenever you feel that you need to transfer your risk to insurer you should buy your policy as your premium increases with age. If a man of 27 years of age buys term plan online, his premium comes to approximately Rs. 12000 for the sum assured of Rs. 1 crore. The premium for female is Rs. 10000 for the same cover. If you postpone your decision to buy your cover the impact is the risk of uncertainty, high premium in future. Premium of above mentioned plan at the age of 40 for male and female are Rs. 19000 and Rs. 17000.
Tax saving with Insurance
In our country, you get income deduction of up to Rs. 1 lac per annum if you buy insurance plan – Endowment, Money Back plan, Pension Plan which give you bonus or Term plan. If you buy unit linked plans, you get the benefits only if the sum assured is 20 times of your annual premium. In this way if you are paying Rs. 20000 as premium, your sum assured should be Rs. 400000. In total you can save Rs. 30900 on the premium of Rs. 100000, as income Tax by paying premiums at 30% income Tax slab.
One should concentrate on one’s career freely by transferring risk to insurer. Assess your responsibilities and liabilities in terms of money with rising inflation. Compare the Term plans with low premiums. There are some plans which charge little higher premium but offer many good features as we always see the risk of death in isolation, but being critically ill is also a big risk, some policies have option of waiver of premium in case of critical illness or accidents which cause you permanently disable. In that case this policy is worth taking in spite of having little higher premium. These days there are many cheap term plans available online which offer high sum assured with riders. Insurance is like a security guard who has its cost, so you should buy for the time you are exposed to financial risk only. Every responsible person male or female exposed to risk of financial loss should protect his or her family.