October 24, 2021

If the income of the family’s sole breadwinner reduces by 1% it may not be a big problem. However, if it decreases by 10%, it can be a huge reason to worry. Here, the family will have to cut down on expenses to ensure financial stability.

Similarly, what if the earning member’s income reduced by 40%? In this case, the family members may have to compromise heavily on their comfort and lifestyle. Have you wondered how will your family cope with all the expenses if you are no longer around? Here, term insurance will come in handy to your family to maintain the standard of living of your dear ones. It can ensure that they live a financially-stress free life.

Many people randomly invest in a term plan with a sum assured of INR 1 crore. They feel that this amount will be sufficient for the family. However, with inflation and increasing costs, even an INR 1 crore term plan might not be enough.

Why an INR 1 core term plan might be inadequate

The core reason for this is the rising inflation rate. Additionally, your expenses are increasing every year due to your changing lifestyle. Ideally, you may invest in a term plan that offers a sum assured of at least 10 times your annual salary after considering all your assets and outstanding debts. However, you may tend to miss out on the inflation aspect over here, which can put your family’s economic security at risk during your absence. So, it is advisable to opt for a sum assured, which is 15 to 20 times your yearly income. Such a huge sum can help your family to cover the rising cost of inflation.

Let us take the example of Haresh. He is a 32-year-old individual who earns an annual salary of INR 15 lakh. He opts for a term plan worth INR 1 crore. He will retire at the age of 60. So, if anything unfortunate happens with him today, the sum assured needs to be enough to meet his family’s monetary needs for the next 28 years.  Following the thumb rule, Here, as per the thumb rule, Haresh should have selected a sum assured of at least INR 1.5 crore. However, even that amount is inadequate, as we have not considered the cost of inflation. If you calculate the rate of inflation at 8.5% per annum for 28 years, then Haresh needs to choose a sum assured of over INR 3.5 crore. Therefore, it is recommended to use a term insurance calculator to ascertain the sum assured before buying a policy.

Factors to consider while finalizing the sum assured

  1. Family’s future needs

In your absence, your family may have to go through struggles. Even though you have already purchased a term plan for them, problems may arise if the coverage is insufficient. You need to make sure if an INR 1 crore sum assured is enough for them and can fulfill their financial requirements. So, you need to note down your family’s current expenses, such as grocery bills, utility bills, medical costs, education expenses of a child, and EMIs on loans. Then, multiply the total that you get by 8.5% with the plan’s tenure, to get a proper projection of the family’s future expenditure.

  1. Inflation

Inflation will continue to affect your bank balance and sum assured value. If you feel that an INR 1 crore term plan will shield your family’s future, think again. Assume that your property’s value has increased almost 10 times in the last few years. Its price will rise again in the future due to inflation. This indicates that the prices of products and services will soar in the upcoming years.

Term Insurance is essential for your family’s monetary safety. However, this does not mean that an INR 1 crore term plan is worth it. Therefore, it should not be a benchmark figure. Calculate your sum assured carefully. Use an online calculator to ascertain the term insurance premium that you will have to pay throughout the tenure.

Steve Campbell

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