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Having inadequate life insurance protection could be as devastating for your dependent family members as not having a life insurance cover at all. If you don’t have any life insurance cover, you may identify your insurance requirement and get the appropriate product. But if your life insurance size is inadequate, you may not know it until you review it correctly.
Hence, it’s essential to understand why you may still be underinsured, how it may impact your family’s financial future and how much protection would you require for adequate coverage.
How to determine adequate cover size
One of the key purposes of a life insurance policy is to ensure financial support to the insured’s dependent family members after his or her death. There are various ways to ascertain the financial need from the insurance point of view; however, the thumb rule is to have life cover of at least 10 times your current annual income. Meaning, if your current annual income is Rs 10 lakh, you should have a life insurance cover worth at least Rs 1 crore. If your cover is less than Rs 1 crore, you are underinsured. Another method to ascertain your life insurance requirement is using the Human Life Value (HLV) method. Under the HLV method, you need to consider your current income, expenses, expected future responsibilities, and goals to determine the insurance need. You may take the help of any HLV calculator available online.
Why your life cover may be inadequate
There are several reasons why your insurance cover may prove to be inadequate. If you have taken your life insurance several years back and thereafter never reviewed it, there is a great chance that you would be underinsured. Over a period of time, your income, expenses, and your family’s lifestyle may have changed significantly. Your financial goals may have also changed. Therefore, the life cover that you had taken several years back may not be adequate.
Another reason is the impact of inflation on your insurance needs. In the long-term, your life insurance need should be adjusted to the inflation rate; else, your existing insurance may not be able to effectively meet the future requirement of its beneficiaries. Sometimes, people pay a hefty premium in their traditional life insurance policies like endowment plans, but little attention is paid to the all-important sum assured. Thus, they fall short of their life insurance requirement.
Now, let’s find out how you can stay adequately insured throughout your life.
How to stay adequately insured
To stay adequately insured, you should inculcate the habit of reviewing your insurance needs in regular intervals, say every 2 years, 3 years, or 5 years.
Whenever there is a change in your family structure, for example, when you get married or have children, you should relook your insurance cover. If required, you may increase the coverage.
Suppose you are taking a new loan that you have not considered in your existing coverage. In that case, you should increase your life cover to that extent so that if something happens to you, your dependent family members don’t have to bear the additional burden of the loan EMIs.
You may also want to separate your insurance needs from your investment needs. Pure life insurance products i.e., a term plan, can give you better and more comprehensive life cover than an endowment policy at the same price point.
By separating investment from insurance, you’ll also benefit from having greater flexibility in your investments as per your financial goals, risk appetite and liquidity requirements. Term plans could provide excellent protection and are usually much cheaper than traditional policies, especially when started at a young age.
Some people use life insurance only as a tax-saving tool. They neither look at its features nor their actual needs and often end up buying the wrong product. Therefore, you must separate your insurance, investment, and tax-saving needs. Insurance needs change with changes in age, income, expenses, debt, lifestyle, inflation, etc.; and you need to factor in these changes and top-up your insurance purchases to bridge the protection cap and stay adequately covered.
(The writer is CEO, BankBazaar.com)