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    How much life insurance cover should you have?

    Brand Story by Bank Bazaar
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    Investing in a life insurance policy is perhaps one of the smartest investments one can make, offering financial security against multiple scenarios. The process of buying insurance has become extremely simple these days, with a number of insurance companies offering their products online. This ease of purchase can often result in slight miscalculations, primarily with regard to the sum assured or the cover provided by the policy.

    According to reports, under insurance or not choosing the right cover amount is prevalent across the globe, with the global gap between the cover availed by entities and the cover which was needed being a whopping $168 billion.

    Now, while the report takes into consideration different categories of insurance like car insurance, motor insurance, etc., it should be an eye-opener for us.

    Most of us purchase an insurance policy after taking our current circumstances into account, expecting the sum assured to be sufficient during an unforeseen event. For some, this amount is adequate, but in some cases this amount might not be sufficient.

    Given this point, one might find himself/herself lost as to the cover they truly need.

    For example, let us take the case of Mr. Raj, a businessman who purchased a whole life insurance policy, with the sum assured being Rs.40 lakh. Raj, at the time of purchase was 40 years, having two children, aged 11 and 7 years respectively. He was the only earning member in the family, with his wife being a homemaker.

    Raj had liabilities to the tune of Rs.30 lakh, which included a home loan and a business loan. He assumed that the cover chosen by him would be sufficient to handle the needs of his family in his absence. In addition to this policy, he also had a fixed deposit, a PPF account, and investments in mutual funds, which he hoped would be an add-on during an emergency.

    Unfortunately for him, he was diagnosed with a serious illness which was not covered under his life insurance policy. Given that he had no health insurance policy, he had to dig into his savings to pay for the treatments. He passed away a couple of years later, even as his children were yet to complete their studies.

    Now, the sum assured paid to his wife went towards settling existing loans, leaving around Rs.10 lakh for their use. Given mounting costs, rising tuition fee, inflation, etc. this amount would hardly be sufficient for the family to survive on for the next few years, and they would have to find an additional source of income to make ends meet.

    Mr. Raj made the mistake of miscalculating his insurance cover. He was underinsured for his lifestyle and needs. This is a common case across the world, with most of us failing to compute the right insurance amount.

    Tips to determine the right insurance cover

    We are all unique, and as such we cannot depend on a generic cover to meet our specific needs. One should always consider these basic aspects while choosing the sum assured.

    • Calculate current monthly expenses - One should always compute the current monthly expenses, ensuring that the premium is affordable. Typically, higher the sum assured higher the premium. Opting for an extremely high sum assured could result in premiums which are unaffordable, taking a toll on the current financial health of the family.

    • Take inflation into account - Inflation is a reality which we cannot escape from. With the cost of living going up each year, it is imperative that we estimate inflation for the future. Ideally, one can assume an inflation of 5% each year while computing the sum assured requirements. Failing to do so could dilute the value of an investment over time.

    • Identify liabilities/debts - Debts like credit card bills, loan repayments, etc. should always be considered while choosing the sum assured. The cover amount should be sufficient to clear all these debts and have sufficient balance to help the family financially.

    • Compute additional income sources - Investing for the future is always a good option. If one has additional income sources which could be used by the family during an emergency, he/she could choose a lower sum assured. On the other hand, individuals who have no savings/alternate income source might have to choose a higher sum assured.

    • Determine future obligations - Most of us have family obligations for which money is critical. Individuals who have children who need to be educated or dependent family members should always take a higher sum assured.

    Life insurance policy is expected to alleviate tensions about the future. Choosing the right sum assured is extremely crucial in order for the plan to do justice to expectations. Taking a few minutes to get this right will surely help your loved ones in the future.



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    ( Originally published on Dec 07, 2017 )
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