Everyday, you will either hear or read opinions on how important it is to get insured early, right age to invest in life insurance, types of life insurance etc. However, have you given enough thought to how MUCH of life insurance is enough? Being adequately insured is as important as investing in the right type of insurance policy. In many cases, customers have a very short-term view to investing in insurance, which might be either tax saving or low premiums related. However, inadequate insurance is as risky as having no insurance at all as it results in an equal amount of hassle and trauma for your loved ones in case of your unfortunate demise.
Let’s take an example to showcase the insurance planning habits of a customer – Mr. XYZ, at the age of 30 earns Rs 5 lakh per annum and has a total outstanding loan of Rs 22 lakh (Rs.20 lakh for his home and Rs.2 lakh for his car). He has an existing insurance coverage of Rs 10 lakh and he feels his family would require at least 15 times of his current annual income in case of any unfortunate event.
The following graphic illustrates the actual insurance requirement of Mr. XYZ as against existing perceived requirement of Rs. 75 lakh as sum assured. This graphic will even give you a sense of how to calculate your insurance requirement when you have an outstanding loan to account for.
As it is visible from the above picture – Mr. XYZ is under insured and needs to buy a new insurance whose sum assured (SA) would be Rs 87 lakh.
Now let’s discuss the consequences of no insurance& low insurance:
If you are not insured, your family doesn’t get a protection cover. This means that in case of an unfortunate incident, your family might become financially unstable, unless you have deposited surplus amount in bank FD or any other financial instrument. If you are the only earning member in the family, then it’s all the more important for you to get insured adequately.
The whole idea of investing in a life insurance policy is to be able to support your loved ones in their hour of need, incase of your untimely demise. An Inadequate insurance cover completely defeats the purpose of investing in an insurance policy. Before blindly agreeing to invest in something sold by your agent for the purpose of “tax savings” it’s important to step back and ask yourself “what am I investing in this insurance policy for? Protection from whom and for what?” This will help answer a few fundamental questions about the type of insurance you need and the insurance cover that you should opt for.
About the author: This article has been written by Mr. Gaurav Rajput Director Marketing Aviva India.