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

Published: March 29, 2017 at 10:34 am

Last Updated on

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.

Before we begin, my book with PV Subramanyam, You Can Be Rich Too is available at a 50% discount (Rs. 198) for short periods of time this month as it was among the top 25 bestsellers in the last 3 months. Grab it now!

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!

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!

New Delhi DIY Investor Workshop April 23rd, 2017

Register for the New Delhi DIY Investor Workshop April 23rd, 2017

You Can Be Rich Too With Goal-Based Investing

Happy to announce that my book with PV Subramanyam has been selected as part of Amazon Best Reads Mar 2017. Now 50% off! Thank you for your support and trust. If you have not yet got the book, check out the reviews below and use the links to buy.

Reader Quotes:

Gift it to your Friends and Relatives whom you care more. Already follower of Pattu and Subra’s forum. Ordered 4 more copies to give gift to my friends and eagerly waiting to read

The best book ever on Financial Freedom Planning. Go get it now!

Your first investment should be buying this book

The (nine online) calculators are really awesome and will give you all possible insights

Thank you, readers, for your generous support and patronage.

Amazon Hardcover Rs. 199. (50% off)

Kindle at (Rs. 307)

Google Play Store (Rs. 307) If you purchase the first book they give 75% discount to promote online e-book purchase. Subsequently, they provide 50% on next book. No code required.

Infibeam Now just Rs. 307 24% OFF.

If you use a mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!

Bookadda Rs. 344. Flipkart Rs. 359 ($ 3.70 or Rs. 267)

Google Play Store (Rs. 244.30)

  • Ask the right questions about money
  • get simple solutions
  • Define your goals clearly with worksheets
  • Calculate the correct asset allocation for each goal.
  • Find out how much insurance cover you need, and how much you need to invest with nine online calculator modules
  • Learn to choose mutual funds qualitatively and quantitatively.

More information is available here: A Beginner’s Guide To Make Your Money Dreams Come True!

What Readers Say

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps