Life insurance has one job: if you are not there, your family should be able to live the same life, repay the loans and still reach their goals. Most families in India are underinsured because they buy policies for tax saving or returns rather than for cover.
The quick rule: 10 to 15 times your income
A common rule of thumb is cover worth 10 to 15 times your annual income. It is a useful starting point, but it ignores your loans, your children's goals and the savings you already have.
The better way: add up what your family would need
- Living expenses. What your family spends each month without you, for the years until you would have retired. These expenses rise with inflation.
- Loans. Home loan, car loan and any personal loans still outstanding.
- Future goals. Children's education and marriage, or support for parents.
- Minus what you already have. Savings, investments and existing life cover.
Our Life Insurance Need Calculator does this for you in a minute.
Why term insurance?
A term plan pays the sum assured only if the insured person dies during the policy term. Because there is no investment element, the premium is a fraction of traditional plans. For the same budget you can usually buy many times the cover. Keep your investments separate, in mutual funds, PPF or other options suited to your goals.
Five mistakes to avoid
- Relying only on your employer's group cover, which ends when you change jobs.
- Buying cover that ends at 50 or 55 while your loans and children's needs continue.
- Hiding health habits or conditions in the proposal form. This can lead to a claim being rejected.
- Not telling your family about the policy, or not updating the nominee.
- Forgetting to increase cover after marriage, a child's birth or a new home loan.
