Academy of BFSI,

How Much Life Insurance One Should Have and Why?

Knowing how much life insurance you need depends on multiple factors, including your age, your family status, your current income, and your health, among other realities. You’ll also need a good hand on your estimated household debt on a monthly or an annual basis.

Pulling all those factors together and working with trusted insurance or financial adviser can get you a good estimate of how much life insurance you need, at any point in your life.

No doubt, knowing how much life insurance you need, and then acting on that knowledge, is highly advisable.

Life insurance can protect loved ones in the event of the policyholder’s death. If life insurance was not in that picture, or if it’s not enough coverage, families could be left with a host of devastating bills and a bleak household financial outlook.

That’s a situation that can be reversed with life insurance, especially if you have a good grip on how much life insurance you need.

What Is Life Insurance?

Life insurance stands among long-term investing, homeownership and credit health as the staples of lifelong personal financial priorities. How many Indians are covered by life insurance? According to Irdai’s Handbook 2016-17 (Table 9A), 32.81 crores of policies are in force in the books of life insurance firms in India. Even if we assume that a few lakhs of policies were revived during the year, the total number of in-force policies will not be more than 33 crores. Since many customers are in possession of multiple policies, the total number of people possessing at least one in-force policy will not be more than 30 crores. If we consider those people who are covered by group policies and PMJJBY policies and not by individual policies, even then the number of Indians holding at least one in-force life insurance policy is not likely to exceed 40 crores (with PMJJBY covering 5.35 crore Indians so far). Indians are grossly underinsured So how many people are insurable today? According to most estimates, the figure will be around 80 crores. So, 40 crore Indians have not yet been brought under the ambit of life insurance.

In a word, life insurance represents a contract between an individual (i.e., the policyholder) and an insurance company. In that contract, the policyholder makes regular payments to the insurance company in exchange for a lump-sum payment by the life insurer to the policyholder’s beneficiaries upon the death of that policyholder.

Life insurance payments are made to beneficiaries immediately after the insured’s death and are paid out on a lump-sum basis. The amount of life insurance needed to adequately compensate the insured’s beneficiaries can vary, depending on the policyholder’s financial situation and the financial needs of the beneficiaries.

Term Life Insurance

This life insurance model offers a life insurance customer financial protection for a fixed period, like 10 or 20 years. During that time period, the policyholder makes regular payments (monthly, semi-annually and annually are the most common consumer payment time frames). If in that time, the policyholder dies, the life insurance company pays out to the beneficiaries based on the policy amount (say, Rs 30000000 as calculated below)

Term insurance customers often use the policies to protect against income loss at critical times in a policyholder’s life, like after buying a new home or sending the kids off to college. In those scenarios, term insurance payments can cover those costs in the event the policyholder is no longer around.

If the policyholder is still alive after the term policy period is over, the life insurance company usually offers continued coverage, although likely at a higher insurance rate, given the older age of the policyholder – which the insured is under no obligation to accept.

In general, though, term insurance, since it’s built on a fixed time platform, is usually less expensive than universal life insurance.

How Much Life Insurance Do You Really Need?

To get your life insurance coverage campaign up and running, take the following action steps:

Understand how life insurance companies figure out costs.  Obviously, life insurance companies have financial skin in the life insurance coverage game. On a broader scale, they set the table for any consumer conversation on costs using a variety of actuarial tools, such as rate classes, risk-related issues, and demographics. Insurers break those categories down when calculating life insurance costs. Specifically, life insurance rates are set by a variety of personal consumer factors, including the policyholder’s health (most insurers insist on a medical exam), the policyholder’s family medical history, lifestyle issues (whether you’re a smoker and if you get enough exercise, for example.) If you are a smoker, or you’re living a sedentary lifestyle, expect to pay more for life insurance.

Once you understand how life insurance companies operate, cost-wise, and know what factors they use in setting premium rates, you can estimate how much life insurance you really need.

Start by factoring in your beneficiary’s needs, coupled with your annual estimated income (more on that in a moment.)

You’ll want your total life insurance pay-out to cover your income and cover those larger debts. The idea is to add up your estimated annual income and your total household debts (think mortgage, college, auto, and any outliers like personal loans or home equity loans.)

Add them all up on an annual basis and the resulting number will let you know, in approximate terms, where you stand and what you need in life insurance coverage to financially protect your family.

For instance, let’s say you have the following annual income and debt levels:

Annual income/salary (net) = Rs 15,000,00

Figure out your life insurance coverage number. One formula that has gained traction in financial advisory circles is taking your annual income/salary, add in the amount of existing household debt, and multiplying it by a specific number. The number you can use may range from 10 or 20 times your total salary, income, and debt, and it depends on your personal financial situation.

This formula is useful in getting a “ballpark figure” on life insurance coverage.

In simple calculations, one should have a cover of 15,000,00*20=Rs 30000000

 

Use this formula as a “rule of thumb” exercise, and feel free to add or subtract your calculation numbers as you see fit. By and large, though, you can get a good roundhouse life insurance coverage using this formula.

This creates a safety net for the family, enables them to live with pride and honor even after the breadwinner is no more.

This is the subject which follows the slogan can not replace the breadwinner, but we can replace BREAD’’

A caveat here – this isn’t an exact science, but by using the information above, you can gain a rough estimate of your needed life insurance coverage needs.

Consult with an Expert

As always, it’s strongly advised that you consult with a trusted financial advisor, insurance professional, or estate planning professional to come up with a unique life insurance plan that works for you and your family.

When you do, bring your life insurance coverage estimates using the formulas listed above – that will get you started in the right direction when you’re figuring out how much life insurance you really need.

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