Finding The Right Insurance Cover: Beyond Rules Of Thumb
Choosing the right term insurance goes beyond the '10× income' rule. From income replacement and liabilities to future goals and inflation, your cover should secure your family’s full financial needs.
Life insurance is a safety net that protects your loved ones financially if something happens to you. It’s often said that one should buy life cover worth ten times their annual income. While that’s a useful starting point, several other factors deserve attention.
Every individual’s financial life is different, shaped by income, expenses, debt, lifestyle, dependents, and future aspirations. A young professional living alone may not need the same cover as a 40-year-old with a family and a home loan. The right term insurance should replace your income, clear liabilities, and secure your family’s future needs.
Start with Income Replacement
The core purpose of term insurance is income replacement. A simple way to estimate this is to multiply your annual income by the number of years your dependents would need financial support. For instance, if you earn Rs 10 lakh a year and your family would need support for 20 years, you’d need around Rs 2 crore in coverage. Also factor in expected pay rises, which increase your future earning potential. Your cover should ideally reflect this, not just your current salary.
Add Up Your Liabilities
Your insurance should also be sufficient to clear all outstanding debts, so your family doesn’t inherit them. This includes home loans, car loans, personal loans, and credit card balances. For instance, if you have a Rs 60 lakh home loan and a Rs 10 lakh car loan, your total liability is Rs 70 lakh. Add this amount to your income replacement figure. So, if you need Rs 2 crore for income replacement, your total cover should ideally be Rs 2.7 crore. Ignoring liabilities can leave dependants struggling with EMIs or forced to liquidate assets.
Account for Future Goals
Beyond everyday expenses, consider your family’s long-term financial goals, such as children’s education or marriage. With education costs rising annually, it’s wise to factor in inflation while estimating your cover.
The aim is to ensure that even in your absence, your dependants can meet these goals without compromising their quality of life. A comprehensive cover should account for both living expenses and future milestones.
Don’t Forget Inflation
Inflation steadily erodes purchasing power. A Rs 1 crore cover today won’t be worth as much two decades later. To guard against this, increase your cover periodically or choose a policy that automatically enhances the sum assured over time. This keeps your protection aligned with rising living costs.
The “ten times your income” rule works as a starting point, but the ideal cover depends on your personal circumstances. If you have significant savings, investments, or a working spouse, you may need less cover than someone whose family relies entirely on their income. However, make sure it’s still sufficient to meet long-term goals and emergencies. The aim is not to over-insure or under-insure, but to strike the right balance.
A thoughtfully chosen term plan should do more than replace your income; it should preserve your family’s lifestyle and safeguard their aspirations. If you’re unsure about how much cover to take, seek professional advice to arrive at the right figure for your needs.
(The author is the CEO at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)
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