Rs 50 lakh or Rs 1 crore – these don’t seem like small amounts.
But whether these amounts are enough (for life insurance) or not is another question.
Most people are unable to calculate the right insurance amount. To be honest, many people don’t even see the need to do it… as sadly, they buy insurance just for tax-saving!
There are quite a number of ways to calculate the right insurance amount. I have discussed one such approach earlier in an article titled How to Find the Right Insurance Amount. Another option is to go for thumb rules like ‘having a cover of 10-20 times your annual income’. But the first method is preferable.
But if you were to go by the thumb rule, then if you have an income of Rs 5 lakh, then maybe Rs 50 lakh to Rs 1 crore cover is fine. But if you have an income of Rs 15 lakh, then maybe it’s not enough. Ofcourse there are other factors too. But instead of lazily deciding that Rs 1 crore cover is fine for you, I would suggest you put some effort and find out the right life cover amount.
You might still feel that a Rs 1 Crore Term Life Insurance cover is big today. But remember that you are not going to die today. And when you do die, let’s say (and hope not) after 15 years, just think of the real value of that Rs 1 crore that your family will get? At 7% inflation, it might be worth just Rs 33 lakhs. That would surely not be enough for your family then – if the new breadwinner is still not up on his/her feet properly.
I am not saying that buying a Rs 50 lakh cover or Rs 1 crore insurance plan is wrong. I am just saying that it might not be enough for many people.
And don’t even think about buying such large covers using endowment or money back policies. You will be shocked to see the premiums.
Here is a sample:
Endowment Plans (LIC)
To get a life cover of Rs 1 crore for 30 years (when age of the insured person is 30), the total annual premium comes to around Rs. 3-4 lakhs
Moneyback Plans (LIC)
To get a life cover of Rs 1 crore for 25 years (when age of the insured person is 30), the total annual premium comes to around Rs. 4-5 lakhs
Term Plans (LIC)
To get a life cover of Rs 1 crore for 30 years (when the age of the insured person is 30), the total annual premium comes to around Rs. 20-30,000
Term Plans (Private Cos.)
To get a life cover of Rs 1 crore for 30 years (when the age of the insured person is 30), the total annual premium comes to around Rs. 10-15,000.
(I took these figures from various company websites)
I don’t have anything else to say. 🙂 The difference in premium says everything.
Term insurance is the cheapest way to buy a large and adequate life cover.
Many people don’t feel like buying term insurance, even when it’s so dirt cheap – just because they get nothing in return for the premiums they pay when they survive the policy term.
Since they are 100% sure that they would not die early, they want to invest in insurance 🙂 policies that offer something on maturity. I don’t know what to say. I have written about it already in detail here. Hopefully, such people would realize what is right before it’s too late.
Then there are many people who are actually surprised as to how and rather why the insurance companies pay Rs 1 crore when they are only giving Rs 10-15k as premium annually? They seriously feel that if such policies are being offered, then that means that insurance companies are fools.
But No… the companies are not fools. They are simply using the law of averages to run their insurance business. If 100 people take a term plan for 20 years and pay premiums regularly, not all will die in this 20-year period. Right? In fact, it’s possible that just 3-4 people would die. So the insurance amount (death benefit) is to be paid for just those few people, whereas the premiums are being paid by everyone! That’s how insurance works and that’s why it’s so profitable (ask Warren Buffett and you will know how he built his empire using insurance money.)
Coming back to premiums, there is a way to further reduce premiums.
By creating life insurance ladders – it’s a way of splitting insurance based on requirements like expenses, tenure of financial goals, outstanding loans, etc. But that’s not what I generally recommend. But still, it’s an interesting discussion. I will write about it some other time.
So that’s it from my side.
Do not hesitate in buying a Rs 50 lakh or Rs 1 crore insurance policy if you don’t have that kind of cover right now. Just ensure that it’s a term insurance policy. And better still, do use this method to find out your correct insurance requirement. After that, you can decide what you want to do.