Is Rs 1 crore life cover big enough to secure your family?

Insurance companies and aggregators often pitch customers to buy a life insurance cover of Rs 1 crore. The amount of cover is quite popular these days and looks like big pots of money. Additionally, deals like ‘Rs 450/month for 1 crore life insurance’ or ‘Buy 1 crore life cover at Rs 550 for your loved ones’, look striking and affordable. But is Rs 1 crore cover enough to provide financial independence to your family members in your absence? Not necessarily. You need to work with actual figures to reach an adequate sum of insurance which would suffice for your family members in case of an unfortunate event.
 
You should not fall for big fancy numbers. While deciding the life insurance cover, it is important to remember that the objective of insurance is to provide financial support to your family and/or dependents, in case the primary breadwinner is no more or is unable to earn because of disability or illness. The life cover you decide on should be adequate to help your family maintain the standard of living you would have provided for them always. To ensure an adequate cover, you will need to set your goals and make some easy calculations. Follow the steps to reach the sum.
 
Step 1: Estimate your day-to-day living expenses, liabilities and financial goals: Your life insurance cover should aim at providing same standard of living to your family members even in your absence. Ascertain the following expenses and outstanding liabilities:

• Your yearly household expenses
• Outstanding liabilities like home loan, personal loan, education loan etc
• Present value of your goals like, child's higher studies, her marriage etc

 
Remember to take care of inflation. Your goals which are 10 or 20 years away will become costlier then. You may use readily available online calculators to add the value of inflation to your expenses and goals. Also, assume different inflation rates for different goals. For an instance, education and medical expenses do not carry the same inflation. You will need to do some research for your goals to reach an estimated figure for inflation.
 
Similarly, calculate your annual household expenses and inflate the same to reach the future sum.
 
Step 2: Estimate your savings, investments and other incomes: Once you have ascertained how much you need for your family's sustenance and to fulfil your non-negotiable goals, calculate the value of  your existing savings and investments. Here is a check list:

• Check your stocks and mutual funds savings
• Check your savings into post office, bank fixed deposits or recurring deposits
• Second house or any plot of land bought with an intention of investment. Make sure you do not consider the home where you are living because you would definitely not want to sell it to fulfill any goals in future unless there is an emergency
• Any other source of income such as rental income from let out property etc

 
Step 3: Existing insurance cover: You might already have a life insurance cover bought in the past or the one provided by your employer. Check the sum assured.
 
Once you are through with all calculations, subtract your total savings and existing insurance cover (derived in steps 2 & 3 from  inflation adjusted total living expenses and goals as calculated under Step 1. The sum so derived is your life insurance requirement. Just in case the sum turns out to be negative, you do not need a life cover as you might have all the means to take care of financial needs of your loved ones in any unfortunate event.
 
Most life insurance companies provide online calculators to derive your insurance needs. You may try to use those calculators to avoid the risk of being under-insured. It is always better to buy slightly higher insurance cover instead.
 
Tenure of your life insurance
Choosing an apt term is as important as is to be adequately insured. Go for a term till you plan to retire or till you have financial dependents or till someone else steps into your shoes of earning bread and butter for your family. Insurance is not to generate returns but to take care of your family in case of your absence. Hence, do not mix insurance and investment. Go for a plain term insurance policy.

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