To answer the most pertinent question about life insurance—how much sum assured or life cover is enough—it is important to first realise one’s need. As per the recent ABSLI Protection Survey, 84 per cent Indians feel uncertain about their lives and these uncertainties have increased sharply over the last five years. Interestingly, 83 per cent people realise that life insurance, along with other investment tools, can help in managing these uncertainties better. Unfortunately, in spite of this revelation, an average Indian today is covered only 1.67 times their gross income. In other words, an average Indian is insured for Rs8 lakh while he or she requires a minimum cover of Rs75 lakh. This data highlights severe underinsurance which can be attributed to low awareness and the widespread fixation on insurance-cum-investment products.
It is important to treat life insurance as income insurance and not death insurance. Hence, this question—have I insured my current as well as future income? The biggest truth is that no one knows what the future beholds and uncertainty looms large. It is vital that you protect your income and plan for your finances. For that it is prudent to first decide how much is enough. What was your money doing and what were your plans? In case of income loss, what was the impact? Key to these answers is robust planning. Also, analysing well as to which financial instrument will best fulfil your financial requirements.
Speaking of life insurance, there are several products which offer diverse benefits. These policies must take care of the essential expenses that your family will incur, like standard of living, child’s education and marriage, and other liabilities like loans and debts. Asking yourself the following questions will take you a step closer to determining the ideal sum assured:
What is my income potential?
Life insurance works best as an income replacement tool. Take into account inflation, basic financial needs and your future aspirations to do the math. Therefore, it is important to consider your current and potential income until retirement. As per financial experts, life cover should be 10 to 15 times the gross annual earnings. Ensure the value is enough even after years from when you start.
What are my financial goals and liabilities?
While you decide on your income potential and decide on the total amount needed, do not forget to consider your financial goals and liabilities. They play a decisive role in choosing the appropriate cover, as a higher sum might be required towards protecting your finances completely while gunning for your dreams and aspirations. For instance, if you purchase a cover of 050 lakh, it may be insufficient after 10 years, considering factors like inflation, increasing financial needs and your existing liabilities like loans.
How long do I intend to work?
With millennials and Gen Z coming to the workforce, gone are the days when people would retire at 60. Many desire to pursue their dreams, start on their own, while some would want to work beyond retirement age. A well-planned life insurance cover can make it easy. It can be a second income or a substitute to salary as per one’s plan. Therefore, decide a cover amount that can help you plan your retirement or pursue your dreams at the right time, without the concerns of finances.
How healthy am I?
Its prudent to be realistic about your health conditions and lifestyle. The medical history of you and your family should be considered before deciding on your life cover. It is best to opt for an adequate sum assured at the prime of your health at a competitive and lower price. Higher probability of health risks can lead to draining of finances. It is best to plan and prepare for it, and ensure that it does not eat up your savings or interfere with other financial goals.
Can I augment my cover with need based plans?
Riders will be the answer to your question. These plans alleviate your primary sum assured with need-based covers. While your life insurance amount will protect your income and desired goals, the riders will come into action with lump sum benefits in case of a specific eventuality like critical illness, disability or death due to accident. Riders hand out a lump sum payment upon the occurrence of the event, over and above the base sum assured.
If your life insurance cover is insufficient, then the whole idea of securing your family is defeated. What is the use of a sum that would not even fulfil your future requirements? Answering these questions will guide you towards the adequate amount to truly protect your money.
Singh is chief actuarial officer at Aditya Birla Sun Life Insurance.