Another report states that with a population of over 133 crore, India’s life insurance penetration rate is less than even 3% of the entire GDP and the premium recovered from term insurance is not more than 1% of the total premium received from the life insurance industry.
As per industry experts, the key reason behind this drastic gap is poor awareness about life insurance amongst the masses.
Calculating your insurance needs
The insurance industry experts believe that one must follow the thumb rule while buying insurance policy - the rule says that your life insurance cover should be at least 10-15 times of your annual income. For a person earning Rs. 10 Lakh annually, the life insurance cover must not be less than Rs. 1 Crore (10, 00, 000 X 10).
While making this calculation you must know that this basic calculation does not takes in account your existing liabilities, investments and the day to day needs of the dependents.
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While calculating the right sum assured, the foremost thing to consider is the number of years your dependents would need a monthly income. At the same time, it is equally important to take in account the outstanding loans and the one-time expenses of life like child’s education and marriage.
Assuming you have a loan of Rs. 50 Lakh under your name, the amount will get deducted from the sum assured your dependents receive on your death. Now, even if the remaining amount is invested wisely, there is no guarantee that it will be enough to take care of your family over a long period of time.
It is always suggested that people having huge loans under their name must go for a higher sum assured.
Human life value
A very important factor that most people forget to take in account while taking life insurance is Human Life Value (HLV). The concept of HLV plays a major part in calculating the total income that the individual is expected to earn over the rest of his working life.
It further discounts the future income by the expected inflation rate over the coming years. Under HLV, the expenses incurred on the individual are directly subtracted from this value to show how much is the monetary value of the individual.
Taking example of a 40-yearold woman, who has a 30 per cent share in household expenses and 50 per cent in home loan, she will need to factor in the annual cost of replacing the contributions made.
Moreover, it is important that the life insurance taken must cover the present value of the contribution towards onetime expenses of the family.
Retirement solution
Your life insurance policy must always cover your spouse’s future requirement, particularly if he/she is not earning. Your total sum assured must be capable enough of protecting your spouse’s old age requirements to enable a life of dignity and comfort.
While taking a life insurance cover, it is very important to consider the potential medical, living and help-related expenses. Though, it is equally important to understand that every individual and family’s needs are different from others.
Accounting for inflation
Inflation must be the first thing to consider when calculating future costs. As the years pass, the need of the family will also grow as the prices keep rising.
For instance, if a family needs Rs 50,000 a month in 2019, even at a nominal 7 per cent inflation, the figure will be pushed to Rs 70,000 a month in five years and by 2028, the monthly household expenses would come around 80,000 – 1,00,000. It is very important that your insurance cover factors this.
As per industry experts, it is important to review your insurance cover every five years, especially around some of the major milestones in one’s life such as marriage and birth of children.
It is smart to take policies that come with in-built features like increasing sum assured or life-stage linked enhancement. The increasing sum assured feature eliminates the procedural hassles and helps your family avoid a situation where the sum assured loses value over time.
(Written by Santosh Agarwal, Associate Director and Cluster Head of Policybazaar.com)
