Are You Sure That A Term Life Insurance of One Crore is Sufficient?!

Published: March 29, 2017 at 10:34 am

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Everyone wishes they were a crorepati and this seems apparent from the sum insured chosen for a  term life insurance policy! Why is everyone buying a “one crore” policy? Because it is a large sum? One followed by seven zeros (ten million) is just a number. It may or may not be the right number for your family. Here is why it is important to calculate to the life insurance policy cover you need before you purchase a term life insurance policy.

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The answer to how much life insurance you need is simply common sense. If you are the sole breadwinner of the family then the sum insured is a proxy for your income given to them in a lump sum. If you are part-breadwinner, then it is a share.

This means that sum insured should handle their current and future expenses.

Before we look at the many ways in which the sum insured would be useful, it is important to recognise that there is a limit to which a person can be insured. Most companies are ‘okay’ with offering a life cover = 15 or 20 times the current annual income.

So before we go ahead with an elaborate calculation it makes sense to first shortlist a couple of insurers, find out the maximum amount that they are willing to offer as life cover and use it as a reference. This figure may change when you apply and they find some risk factors – occupation, health issues etc. We will then have to revise the calculation.

The point is before we buy, we must have a rough idea of how the money should be divided and used for various needs. Allow me to explain.

Imagine for the moment, that you are no longer around and list all the expenses your family will have to face:

  1. They will have to generate an inflation-protected income to handle monthly expenses for the next 10,15, or 25 years depending on how old your children are, whether your spouse can work, your existing wealth, etc.
  2. School fees for you children
  3. College fees and if you wish their marriage expenses too.
  4. Any loans that needs to be closed out.

You can use the insurance calculators linked below to find out if you have adequate insurance.  First, a couple of examples to illustrate my point.

Suppose the monthly expenses of your family (exlucing your expenses) are about Rs. 35,000 a month. If your family needs to generate an inflation-protected income with part of the lump sum received as the claim amount then,

if the lump sum is invested in a portfolio earning say 10% and the inflation is 10% (we will have to account for the families lifestyle enhancements too) and if this money is needed for the next 20 years, (until the children become old enough to support themselves and your spouse),

the lump sum required = 20 x 35,000 x 12 = 84 lakhs.

Here 35,000 x 12 = current annual expense. This thumb rule is valid for any portfolio return which is equal to the inflation (real return = 0%).

For such a situation lump sum required = annual expense x tenure.

So if we get a term insurance of 1 Crore, 84 Lakhs from this is necessary to just provide monthly expenses. Please do not assume that your family will invest the amount in DSP Blackrock nanocap fund and earn 45% return year after year. You won’t be around to manage the portfolio like a pro that you are.

What about the kids’ school fees? What about their college fees? Do you think the remaining 16 Lakhs from the claim is enough to handle this? What if you had two kids and other committments? Get my point?

One crore is just a number. Is it your number?

Not only must we calculate the sum insured by taking into account all the future needs of our family, we must also create an action plan as to how the money should be divided up and used. Preferably, the contact number of a SEBI registered fee-only financial planner should be attached with the policy document so that the family can consult them for counsel. Otherwise, some overenthusiastic relative will volunteer to play fund manager and, you know what would lead to!

Note: I am not saying get more than 1 Cr term cover. I am saying, calculate how much you need, before buying. Who knows, it may be less than 1 Cr too!

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Download the insurance calculators

Suitable for both young earners and parents. Will work in any spreadsheet software. Also see: Things to do AFTER you take a term insurance policy!

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  1. While we are at it, why not buy a 50 crore policy and ensure that the family does not have to skip on foreign vacations too on any year after I’m gone. Half a year’s salary as premium ought to be good enough for that.

    Perhaps a better solution is to ensure the death benefit of the policy equals 5 years worth of expenses for the family. 5 years should be enough time for the wife to get on her feet and starting earning her own bread for the family. Why do people expect free lunch all the time and that too for a lifetime?

    1. okay! First let us assume only the husband will die and that wife was not earning anything before. Next let us assume that 5Y “should be enough”. Great!

  2. Huge amounts of wealth created by our middle-class in the past 30 years is largely bcoz of IT jobs which in turn led to people needing 1crore or more with term insurance. A lot of that seem to be going downhill with real threat to IT jobs for senior workers with 12 years experience or more. I am surprised to read many saying they can invest 25k per month for next 25 years. Honestly the lifestyles will undergo plenty of downgrade in the next few years which will mean we may not need such high insurance after all. Who knows we might go back the days of earning-spending=0

  3. Well, wife not earning anything now and not capable of doing so is a bigger risk than husband’s death. Need of the hour is to prep her to earn her own bread even if she gets a 1 crore insurance, else she won’t be able save herself nor her money

  4. Life Insurance is itself based completely on assumptions. Nobody can predict with surety how much death benefit will be required and who will be the first to die. So yes, I am fine with assuming certain things. Nobody owes anyone a lifetime of income and luxury. The breadwinner shouldn’t be expected to bear such heavy burden by paying a hefty premium every year.

  5. Well the answer for why not 50 crores is there in your statement itself that it is not affordable. The premium should be such that it should not burden the present lifestyle. Insurance is not to leave inheritance but to take care of essentials.
    For the second part – why 5 years, why not 6 months or why to even take insurance. What if the surviving spouse is already earning. How can that person double income just if possible. Getting a life insurance money is not free lunch. The family would have paid premium year after year to be entitled for that money. Insurance is not some thing the breadwinner arranges when they die. It is what the family plans in case the money earner dies.

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