Life is a series of winding twists and turns. We work endlessly to build our families a comfortable home, prepare good meals, and plan every step towards a great future. But should we die suddenly and leave this planet, will our dear ones continue having a prosperous life, exactly as planned? This is when term life insurance comes as a true hero to ensure our families' long-term financial security in case of our unexpected demise. It is the easiest and most affordable financial commitment you can make right now to give your family peace of mind for decades to come.
A term life insurance policy is a simple contract where you pay a predetermined sum of money on a yearly basis called a premium, and the insurer will give your family an absolutely overwhelming amount of money upon your death during the term of the policy.
When Indians begin exploring their coverage, they seem to always default to trying to buy a 1 crore term insurance policy. Having 1 crore life cover sounds like a large sum of money to solve every single problem in your family, but does it address all your specific needs? To determine this, you need to be able to know how to calculate your own 1 crore term life insurance requirement and then compare it with the different term life insurance plans currently available in the market.
Why Getting the Right Life Insurance Cover Matters
Deciding to purchase your life cover is one of the biggest financial commitments you will ever make, and getting the cover amount right matters greatly. Undercovering yourself means your family might not have sufficient life insurance in place to make ends meet in a few years, or perhaps to continue with their education and lifestyle when you are no longer here to nurture and support them. However, overpaying yourself can also be costly, as the premium amount due on a yearly basis can begin to stretch your monthly salary quite unnecessarily.
Many people fall into the trap of blindly selecting a figure merely because their friends and co-workers did. Every family is unique, with a unique set of lifestyles, everyday expenses, outstanding bank loans, and future hopes. Calculating your cover amount correctly ensures their current lifestyle continues with no financial sacrifices even when you are no longer there to support them.
Simple Methods to Calculate Your Required Cover Amount
You do not need to be a mathematics wizard to determine your life insurance needs. There are a couple of simple ways to get an idea of what your family needs for a financial safety net.
Method 1: The Income Multiple Rule
The easiest approach is to use your income as a base to determine your life insurance needs. 10–15× income can be used as a rough starting point, but it is not a universal rule. So, a rough estimate would be: if your annual income or business profit is currently around ₹8 Lakh, then your life cover should be somewhere between 80 lakh and 1.2 crores. Coverage should also consider liabilities, future goals, dependants, existing assets and existing life cover.
Method 2: The Detailed Needs Analysis Rule
This method is much more detailed with its approach to calculating the exact sum assured you need to choose as your life cover.
Grab a pen and paper and proceed with these simple four steps:
● Step 1: Calculate your long-term living expenses: Determine roughly what your family needs to live on every year. There is no standard requirement to multiply expenses by 15 or 20. A needs-based calculation should consider the family's future income requirement, inflation, investment returns, liabilities, goals and existing assets.
● Step 2: Add all outstanding liabilities: List all your bank loans in your name, such as your home loan or personal loan. It is very important that these liabilities be covered so that your family does not have to continue to make payments to the bank for your EMIs.
● Step 3: Add all future life goals: Write down all your future family goals, such as the higher educational degree needs for your children and vocational education and marriage costs.
● Step 4: Subtract all existing wealth: Deduct all savings you and your family might already possess, such as bank FDs, mutual funds, and gold investments, from the above figure.
The final figure you arrive at after performing all four steps together is your personalized insurance cover requirement.
How to Use an Online Term Life Insurance Calculator
You do not need to perform all these calculations on paper each time you modify your inputs. You can easily opt for the convenience of an online term life insurance calculator available on every official insurance aggregator or company portal.
An online term life insurance calculator is an intuitive digital tool that performs all the number crunching for you within a couple of seconds. Here are the steps involved in using this handy tool:
● Step 1: Enter personal details: Give your age, gender, the state you reside in, and your current yearly income.
● Step 2: Specify lifestyle choices: Answer yes or no to consuming tobacco or smoking cigarettes, as this affects your price.
● Step 3: Select your desired sum assured: Enter the sum assured amount you previously calculated, such as a 1 crore term insurance.
● Step 4: Select the policy tenure: Choose a policy tenure you wish to go with. It is usually recommended to choose a tenure till your planned retirement age, such as 60 or 65 years.
The calculator will instantly provide you with the monthly, quarterly, or yearly premium you need to pay to enjoy a full ₹1 crore life cover.
By playing around with the calculator's policy duration and sum assured inputs, you can find a suitable fit that comfortably balances your family's full financial security and an affordable monthly premium.
Key Factors to Compare Before Buying a ₹1 Crore Plan
Once you have concluded that a ₹1 Crore life cover is right for your family, you need to shop around for the right deal. Do not blindly pick the first policy that is recommended to you, nor should you go for the absolute cheapest option. Try to compare the different term life plans with each other, considering these key variables:
1. Claim Settlement Ratio (CSR)
The claim settlement ratio is basically the percentage of total death claims that an insurance company successfully pays out to beneficiaries in comparison to the total death claims the company received and processed during the financial year. For example, if an insurance company received 100 death claims and paid out 98 of them, then the company has a CSR of 98%. There is no universal benchmark that makes one insurer preferable. Compare CSR along with claim amounts, repudiation/settlement information, financial strength, policy terms, exclusions and service.
2. Solvency Ratio
Solvency ratio measures an insurer's financial resilience/capital adequacy relative to its liabilities, not its ability to process claims seamlessly or pay all claims at once. Per the instructions of the Insurance Regulatory and Development Authority of India (IRDAI), every insurance provider is required to have a solvency of at least 1.5. Choosing an insurance company with an optimal solvency ratio gives you full confidence that your family's claim will be seamlessly processed without any financial hurdles.
3. Add-On Covers or Riders
Add-on riders are additional benefits that are added to your main life cover with an additional small premium amount. Popular riders include Critical Illness Cover, which helps you pay for treatment if you are diagnosed with a critical illness, as well as Accidental Disability Cover, which supports your family if an accident renders you disabled. Carefully check all the additional rider benefits and decide whether or not they are beneficial to your lifestyle needs.
4. Policy Customization Options
Take a look at the payout options available with the plan. Some offer a lump sum payout of the chosen life cover amount, such as ₹1 crore to your family in one go, whereas others offer a combination of a smaller lump sum amount combined with a regular monthly income payout to your family for a specified period of time. Should your family members not be very financially savvy, the latter option will help them manage their regular day-to-day expenses effortlessly.
Practical Tips to Get the Lowest Rates on Your Plan
Should you ever need to buy a comprehensive life policy, it is much more affordable than you might think. A healthy young adult can get a massive sum assured for next to nothing in comparison to a daily coffee expense. These are some practical steps to take to help you keep your costs as low as possible:
● Purchase Your Cover at a Young Age: Premium rates rise as you grow older as the risk of health problems escalates. Buying a life cover in your twenties ensures you will forever have a very low rate applicable to your policy.
● Buy Directly Online: Buying your life cover directly through the company website will ensure no additional commissions are levied, thus allowing the company to offer you a much lower premium rate than if you were to buy it offline.
● Maintain a Healthy Lifestyle: Non-smokers and individuals with excellent health records receive much lower premium quotes.
● Opt for Regular Payment Terms: Unless you have a specific short-term windfall of cash, always opt to pay premiums on a regular term basis throughout your working life to keep your ongoing expenses low and manageable.
Taking Action for Your Family's Security
A term life insurance policy is not aimed at being a means to make you rich or gain market returns on your hard-earned money. Rather, it's a true assurance that if life takes an unexpected turn, your family will not suffer from any financial difficulties and will continue living the prosperous life you've planned for them.
Do not procrastinate any longer on taking this wise step. Allocate ten minutes to visit a reliable online term life insurance calculator, plug in your family figures, check out the top-rated 1 crore term insurance plans, and decide on the most affordable cover that will provide your family with total financial security for years to come.
