You had seen various ads on televisions, hoardings, newspapers and the internet saying “Get 1 Crore Insurance for Rs x per month”
Rs 1 crore insurance sounds great money. It seems more than enough for most of the middle-class Indian families. But the important question arises “Is it enough for your family?”
For most people, Rs 1 Crore Insurance is a great amount. They think that buying Rs 1 Crore Insurance plan, they had secured their family from any uncertainties. In case of any uncertainty, their family will get the insured amount of Rs 1 Crore.
If that insured amount is deposited in any fixed deposit then their family will get Rs 7 lakhs per year assuming 7% interest rate. For a middle-class family, the income of Rs 7 Lakhs is a good amount.
But unfortunately, while calculating financial needs most of us ignore the most important factor i.e. inflation. Due to inflation, the expenses of our family will be going to increase. They will need 10-20 times more money in the next 30 years to maintain the same standard of living.
Apart from that, the insured amount is also affected by various other factors. If you are young, unmarried then you don’t have so much of financial requirement. However, if you are married, have 2 children then you require higher insurance amount.
How to find the right amount of insurance plan?
Every family has different financial requirements so the same insurance plan is not suitable for everyone. During the starting of career, your financial requirement is much lower. But with the increase in salary, the standard of living also increase and you will require more money.
Like the same way, your expenses will increase many-folds after marriage. So, you have to choose your insurance policy while keeping all your future needs in your mind.
There is a thumb rule that your insurance policy must have 10-20 times of your annual income. This thumb rule is not the exact science but you have to consider this before taking any decision.
If you are in your 30s, having 2 children then your requirement will be higher. You have to consider the living expenses of your family, healthcare expenses, higher education and marriage of your children. Further, you have to make sure that your spouse must have a sufficient amount at the time of her/his old age.
The amount of the policy will further increase if you have any debt like housing loan, car loan, personal loan etc.,
However, if you crossed the age of 50s and your children are married then your financial requirement will be much lower. You should opt for the insurance cover of 5-10 times of your annual income.
Many researches prove that about 80% of the urban Indians either have very low insurance coverage or no insurance coverage at all. The average Indian households are very vulnerable to financial disruption in case of death of the sole earning member.
Apart from that many calculations also proved that if an individual has housing loan and two children then the insurance amount of Rs 1 Crore will not last for more than 10-15 years.
How to calculate the right insurance amount?
Suppose you are 35 years old, having 2 small children and have parents. Your annual income is Rs 10 lakhs. Family annual expenses are Rs 8 lakhs and you can save Rs 2 Lakhs every year. Your total saving is Rs 10 Lakhs but on the liability side, there is a housing loan of Rs 70 lakhs.
By considering the inflation factor, your family will need 10-15 times of money to sustain the same standard of living. Apart from that the higher education of your children and their marriage will require approx. Rs 50 lakhs. Further, you have to save for your wife so that she can survive with dignity at her old age.
By calculating your requirements
Future Family Expenses: Rs 8 Lakhs X 15 times = Rs 1.20 Crore
Higher Education & Marriage of Children: Rs 50 Lakhs
Savings for Spouse: Rs 20 Lakhs
Housing Loan: Rs 70 Lakhs
Savings: Rs 10 Lakhs
If we calculate all these amounts then your requirement is Rs (120+50+20+70-10) = Rs 2.50 Crore.
Now, if you get yourself covered by an amount of Rs 1 crore then there will be a shortage of Rs 1.50 crore which is a big difference.
Review your Insurance plan at 5-year intervals
Calculating the right insurance amount and purchasing the right policy is not sufficient. After purchasing the insurance policy, your requirements may change. As your salary increase, your requirements will also increase. You may take more loans for your children with higher education or their marriage.
So, the amount you calculated early and purchased the insurance plan thinking that it will be sufficient for your family when you are not around may fall short. That is why it is always recommended that you must review your insurance amount every 5 years so that your insured amount will be sufficient even if you are not around.
The bottom line is that never go behind the attractive amount of Rs 1 Crore. First, check whether this amount is suitable or not. Your Insurance should be based on your requirement not on the advertisement of Rs 1 Crore.
Just apply the above process to find the exact amount. If you have difficulty in finding the right insurance amount then you can consult with your financial planner.