Is your life insurance adequate protection for your family?

Life Insurance is about creating a contingency fund for your family. This helps them continue with their lives and achieve their dreams even if something unfortunate happens to you in between. However, your life insurance can only do that if the sum assured is adequate for the family.

How Much is Enough For Your Family?

Do you know that a family of four spending Rs.50,000 a month will need approximately Rs. 2.4 crore to maintain their lifestyle and necessary expenses(see Table: Life Insurance Need)?

Assuming, a 30-year-old person has a family of four and monthly expense of Rs. 50,000. Assuming the dependent spouse is also 30 years and has a life expectancy of 90 years (life expectancy is rising due to medical achievements). The expense will increase with inflation, and the income from any risk-free investment will be taxed (assuming at a rate of 5.5% at current slab rates).

Therefore, the effective rate of return your family will get on the money deposited to generate an income of Rs. 50,000 per month will be just about 1.5% per annum.

At this rate of return, if anything happens to you tomorrow, your family will need approximately Rs. 2.4 crore to continue their life unchanged for next 60 years.

Table: Life Insurance Need

You can understand that your ‘current life insurance need’ depends on the life expectancy and your current household expenses.

Note: If you are about 30 years old and have a different amount of monthly expense, simply multiply Rs. 2.4 cr. with the ratio of your expenses with Rs. 50,000 assumed here. For example: if you monthly household budget is about Rs. 30,000 your life insurance need can be only Rs. 1.44 crores (2.4 x 3/5).

How much Can You Buy?

Your life insurance need may be high, but you may not always be eligible for the whole amount. Usually, insurers cap the maximum eligibility at 20 to 25 times of your annual salary. That means if you are earning about Rs. 12 lakh a month then only you will be eligible for a term life insurance of Rs. 2.4 crores.

So, how can you complete the deficit?

You may increase the cover over time as your income grows, also simultaneously, build assets. Invest your surplus in equity and fixed income instruments as per your risk appetite. This corpus also reduces your life insurance need, if it provides sufficient liquidity.

When Could Less be Sufficient?

As mentioned in the previous paragraph, investment assets can reduce your life insurance corpus need. However, there are two conditions attached to it:

a. Assets must be liquid enough
b. Assets should generate income

Supplementing your life cover:

Does Real Estate Count? You may feel that owning a lot of real estate properties makes your family safe from financial troubles in your absence. Though, any fixed asset does not start generating revenue on its own. Even residential properties which are already generating rent, face maintenance expenses and at times results in loss of rent and rent collection expense as well. Not to mention liquidating a real estate can be a nightmare and is a long process.

Can You Count on your Equity investments? Probably not! Equity is a high risk, long term investment, and can be quite volatile. Dividends are completely dependent on the market situation, therefore highly uncertain.

Fixed Deposits, Liquid Mutual Funds, Debt Funds? Yes, these are the type of assets that can be counted as liquid assets, if they are without lock-in.

Saving Plans from Life Insurers and Pension Plans? These investments have very stable values over their lifetime and can also generate regular income for the family. Thus, you could count them as liquid and generating income.

Therefore, if you have invested a significant portion of your savings in any of the following assets (see Example: Reduced Life Insurance Requirement), your total life insurance need can be reduced.

Example: Investments that can Reduce Your Life Insurance Need

So, if you have invested in these assets your life insurance need can be reduced by the asset value as on the day of the calculation. It is evident that saving this much money can take a while for any investor, and that is why, investors above the age of 40, may find needing less insurance than they will need at the age of 30.

Does Lot of Assets Make Life Insurance Unnecessary?

A typical balance sheet for a family may look like the one below:

Table: A Typical Family Balance Sheet

We have already discussed the type of assets that can be counted as financial security for your family. In the balance sheet, you can see that assets like real estate form a large part of the total wealth, and cannot even count it as equivalent to a life cover.

If you have most of your wealth concentrated in these assets, your family does not have sufficient liquidity to live a life free from financial distress.

So, the answer is no. Huge amount of assets do not make life insurance unnecessary, in fact, you may have to add the expenses of managing these assets to your monthly or annual expenses to estimate your life cover need.

How To Buy Adequate Term Life Insurance?

The easiest way to avail adequate life insurance quickly is to apply online.It is easy to compare prices and even check the eligibility. You can check your term life insurance quotes and eligibility in this Term Insurance Premium Calculator by ICICI Pru Life. Buying online is always cheaper when it comes to term life insurance you enjoy complete transparency in terms of your policy issuance and other support items.