“You should take a life cover of 8-10 times of your annual income.” Does not this sound like a gospel now-a-days? Yes, almost! To some of us this is more surprising as we are receiving these calls from the same insurance agent who, just a year back or so, did not even bother to mention term insurance, forget pitching or selling the same. Though this article has nothing to do with finding the reasons behind this sudden change in the insurance agents’ mindset, but before I go further I can give you the following two points to ponder over:
- After the regulator capping various charges of ULIP, commission for agents has come down by a good margin. Also after ULIP getting drubbed heavily all across the media, agents are finding it very difficult to get an appointment when they talk ‘insurance’. But when they start discussing about Term Insurance over phone, they are finding it easier to get an appointment. Afterwards in a face to face discussion, a ULIP can be sold, who knows!
- Realizing the need for insurance and thereafter coming down to an exact amount of life cover one needs, “is a subject matter of solicitation”. If the same is being done in a hurry and in a very aggressive way, the motive is questionable. Let me give a hint – Does your agent encourage you to buy life cover though online also? I am sure you got the answer by now!
Now, let us come back to the starting line “You should take a life cover of 8-10 times of your annual income.” – How true is this?
Let us answer another question first – What are the factors that determine the life cover you need to take?
Ok, the answer is here –
- Your age
It matters a lot whether you are 28 or 48. Your need for insurance will vary widely with your age.
- Spouse’s age and life expectancy
To know how long your dependent spouse will require a regular flow of income is very critical. Difference between life expectancy and spouse’s current age can help you to arrive at that figure.
- Number of children and their age
Child’s educational expenses till he/she gets a job and the cost to be incurred for marriage, is the second most important goal we all have. A family with a single child and a family with two children will surely need different amount of cover.
- Your income
If the spouse is also earning, then taking into consideration her contribution also is very important.
- Percentage of income you spend on yourself
It is a fact, that when the policy holder is not there, all the expenses which are centred on him will also not be there
- Expected inflation
The value of money does not remain same over the years. Expected rate of inflation has lot to do with arriving at a right figure.
- Expected growth of income
Your income is supposed to grow at some or other rate. Accordingly your lifestyle expenses will also change.
- Basic living expenses
Rent, travel costs, expenses on food and utilities are to be included here. A very interesting fact here is that all these costs will also vary with one’s place of stay whether it is City (Tier I/II/III) or village.
- Life Style expenses
Child’s education fees, car’s maintenance, weekend’s dining out, going to multiplexes – expenses for all these is to be included here. It goes without saying that this will also vary from place to place.
- Provisions made in form of defined contribution (e.g. your EPF)
- Amount you are going to get from defined benefits (e.g. your Gratuity)
- Value of assets you already have (Exclude residential property)
- Your liabilities
Your loans, to be more specific, your outstanding loans are to be paid duly in time. This burden should not get passed on to your dependents without providing adequate cover for it.
- Whether you have dependents other than your spouse and children
This list is not an exhaustive one though. Few other factors can also make it to the list, but the above mentioned factors are very crucial and unavoidable. Now answers to all the queries above cannot be exactly the same for all of us. We are all unique individuals, right? As each of our needs and wants are different, so do our income, expenditure, assets and liabilities A slight mismatch here and there will make a huge difference in the final figure.
If we generalize the things, or go very casual about it then we are doing a huge injustice to ourselves and to our dependents. Some insurance agents say, when you are in a hurry, you can use this thumb rule to calculate the life cover you need. But the question here is, should we take such a critical decision of our lifetime in a hurry. NO. This is not something like deciding which movie to be seen this weekend. You can not act that casual here.
Gather facts and figures, do proper analysis to quantify the impact of one’s absence in his/her dependents’ lives, check out the provisions you have already made and see what figure is coming out. This is a job of a seasoned risk manager or a financial planner. Take their advice and go for an appropriate life cover. And please don’t do all these things in a hurry or by the help of a thumb rule.
So let the new thumb rule be “You should take a life cover only after consulting a Financial Planner and analyzing all relevant factors in full details”.