Several insurers advertise term insurance plans that provide INR 1 crore coverage at an affordable premium. You may be tempted to consider this option because a sum assured (SA) of INR 1 crore appears to be a large amount.
Often, you may think that it will be sufficient to ensure the financial stability of your family in case of your sudden absence. An amount of INR 1 crore deposited in a bank account will provide a monthly income of over INR 58,000 at an interest rate of 7%.
However, a SA of INR 1 crore may not be adequate to ensure the monetary security of your loved ones in case of an untoward incident. Here are three things you need to consider while determining the suitable SA when you buy term insurance in India:
One-time expenses
While ascertaining the ideal SA, an often overlooked aspect is one-time costs. These may include repayment of a home or personal loan in your absence. Additionally, while INR 1 crore may take care of your family’s monthly household and other regular expenses, you need to consider future expenditures, like your children’s higher education and wedding and your spouse’s retirement years.
The appropriate SA will depend on your life stage. While choosing accurate SA, a single solution does not apply to every person. You need to consider your annual income and family’s financial requirements to calculate an adequate SA.
Inflation
As the term insurance premium is based on the SA, you may opt for a lower amount to reduce this expense. However, while calculating the SA, do not forget to take the increase in future expenses due to inflation into account.
If you consider an annual inflation rate of 7%, the current expenses of INR 50,000 will increase to over INR 70,000 in five years. Therefore, do not ignore the rise in costs due to inflation. You should re-analyze the insurance coverage every five years to align it with the rising needs of your family.
Many insurers offer increasing SA or life-stage related coverage. These term insurance plans in India allow you to easily enhance the SA over a period to provide substantial coverage to your family in your sudden absence.
Requirements of your spouse
When you are contemplating buying a term insurance plan, remember to consider the monetary needs of your spouse. The monetary benefits of the policy should be enough to ensure your spouse is able to maintain a comfortable and dignified lifestyle during old age even if you are there.
Additionally, you need to keep in mind about your spouse’s future medical and help-related costs due to ill-health. You must choose a higher SA if you are buying the policy for your dependent children, in addition to your spouse. You may use an online term insurance premium calculator to determine the approximate expense to avail of higher SA.
If you are still not sure about what is the correct SA, consider buying a term plan with an increasing SA. These types of term insurance plans let you increase the SA at periodic intervals to match the rising requirements of your family. The SA increases by 5% each year for a maximum of 200% of the original coverage amount.
Moreover, you may choose from multiple payout options for the policy benefit in case of an unfortunate event. Your nominee may receive the entire SA as a lump sum in your absence during the policy duration. Alternatively, your family can receive a regular installment over a period of five or ten years until the insurer pays them the entire SA.
Insurance companies offer different types of term insurance plans. It is important that you understand what is term insurance and compare various conditions applicable to make an informed decision.
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