A lot has been written on whether life insurance should be bought to ensure the family is protected in the case of the main breadearner’s death or whether it should be used more as a savings tool. At bigdecisions, we believe strongly in the former, as a guiding principle.
An equallly often asked question concerns how much life insurance is considered appropriate. Let’s try and answer that via an example. Take a person who’s 39 years old with the following details:
Now, if this person passed away unexpectedly, apart from the grief of losing a loved one, his spouse will also be hit by a big financial problem as all she gets is the sum assured (and some more if the policy was bought way back and the corpus has grown). So, we’re talking about her getting Rs. 10 lakhs as the life insurance amount. There’s a home loan of Rs. 20 lakhs outstanding. Imagine for one minute, your spouse having to decide between selling off the home to pay off the home loan or having to encash every rupee of your savings just to hold onto your home (since her salary is inadequate to cover all expenses including the EMI)
Here are a few basic rules of thumb in this regard:
1. Each one of us must have atleast as much life insurance (in terms of the sum assured) as much as our home loan outstanding. It is a legal requirement in some countries.This is an absolute must and
cannot be compromised upon. In this example, a Rs. 20 lakh term insurance plan bought online will cost well less than Rs. 500 per month (or Rs. 6000 per year). While too many additional expenses seem difficult to commit to at such time, surely, Rs. 500 per month is doable
2. Better thing to do however, is to plan such that your family is guaranteed an amount which when put on interest, will cover their expenses. While there’s no easy, rule of thumb here, a quick check online will show an amount that will ensure his family continues to get Rs. 55,000 per month (their current expenses) inflating annually.
To sum up, one of 3 choices must be made, with respect to the amount of life insurance you need:
1) Get life insurance cover equal to the current home loan outstanding. This is the least everyone should have and any compromise on this is plain, unacceptable.
2) Get life insurance cover enough to cover for current expenses (after adding an expected inflation rate for the family after you’re gone). In most cases, this is likely to be the ideal case.
3) Get life insurance cover to replace your current income (after adding an expected annual increase in the same). In most cases (typically in cases where expenses are comfortably lower than income), this would be considered very safe but might not be easily affordable. If possible, it could be a great option though.
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