Is insurance cover of Rs.1 crore enough?

K. ARAVIND

 

“Life coverage of Rs.1 crore for just Rs.490 a month’ – is the motto of a life insurance company. Such advertisements, which offer life coverage of Rs.1 crore, regularly appear in the media. Life coverage of Rs.1 crore per month for a small amount of money is definitely attractive. But is a crore rupees worth of life coverage enough for everyone?

Do not limit life insurance coverage to less than Rs.1 crore. The amount of life coverage an individual needs is determined on the basis of various criteria.

The life coverage must be determined based on how much money is required for the dependents to sustain their standard of living in the event of the death of the policyholder. Therefore, life insurance coverage should be at least 15 times the annual income of the policyholder. For example, if you have an annual income of Rs.10 lakh, the required insurance cover is Rs.1.5 crore.

 

This is one method. Another way is to determine life coverage for your family based on future expenses and current investment.

 

According to the second method, the income that a person can earn during his working life is calculated first. Subtracting the existing life insurance coverage, savings and other investments from this, you can calculate the required life insurance coverage amount.

 

For example, suppose the current annual expenditure of a 30-year-old person is Rs.3 lakhs. If he intends to retire at the age of 60, he can be expected to work for another 30 years. If the cost of living for 30 years is multiplied by Rs.3 lakhs, it can be considered as Rs.90 lakhs.

 

Add to this the balance of the mortgage and the cost of educating the children. Assuming these two expenses are Rs.50 lakh each, the total requirement is Rs.1.90 crore.

 

Exempt current life insurance coverage and other savings from this. Suppose you currently have life insurance coverage of Rs.20 lakh and savings of the same amount. Then the required life insurance coverage can be estimated at Rs 1.50 crore (Rs1.90-0.40 = 1.50).

 

It is clear from this example that insurance alone is not enough to ensure life coverage of just Rs1. crore. Therefore, care should be taken to determine the required life coverage before taking out a term policy.