Are you underinsured? Find out the amount of cover you need
When Aegon Religare Life Insurance began operations in India in 2008, its marketing campaign focused on the problem of underinsurance in India. In the past seven years, pure protection term plans have become more popular but a large number of Indians are still afflicted by KILB (Kum Insurance Lene ki Bimaari). A recent study by global reinsurer Swiss Re estimates that for every $100 (approximately Rs 6,500) needed for protection, the average Indian household spends only $7.8 (Rs 507), leaving a massive protection gap.
This gap is largely because Indians prefer to invest in endowment insurance plans or Ulips instead of buying pure protection term plans that have no maturity value. Only 14% of the 4,488 respondents to a recent survey by Ficci and Canara HSBC OBC Life Insurance had bought term insurance. An overwhelming majority (64%) had taken traditional plans and 19% had invested in Ulips.
If you have bought an insurance-cum-investment plan, chances are that the protection element is not big enough to meet this basic objective of buying life insurance. Traditional plans fall between the two stools of good returns and adequate life cover—they offer poor returns and very low life cover.
How much cover you need
An adequate life cover ensures that the family goals are not hampered due to the breadwinner's death. "Insurance should be taken to ensure goals are met on the target date, and the family does not have to bear financial loss, in addition to emotional loss, in the case of resources planned for a particular goal being insufficient to meet the goal expenses," says financial planner Dilshad Billimoria.
So, an individual must have an insurance cover that can help replace his income if something untoward happens to him. The life insurance cover should be big enough to generate income that can take care of the expenses of the family till his dependents are self-sufficient.
Web aggregators help you compute the ideal life cover taking into account your income, dependents and liabilities. However, you need to go beyond these calculators to ascertain the right sum assured. One broad approximation is about 6-7 times the annual income of the individual.
But this does not always reflect a person's insurance need. If he earns Rs 12 lakh a year (Rs 1 lakh per month) but has taken a home loan of Rs 50 lakh, he needs more cover than the Rs 72-84 lakh suggested by this approach. Pune-based Nagesh Pathak has an outstanding home loan of Rs 51 lakh. His life insurance cover must be big enough to settle this debt. On the other hand, if an individual also has other assets and investments, his insurance needs would be far lower.
"A simple rule of thumb would be 15 times gross annual income for those below 40 and 10 times for those above 40. To play safe they can add approximate current value of all goals to this figure," says financial planner Suresh Sadagopan.
Other more sophisticated means of arriving at the ideal figure include human life value (HLV), need analysis and income replacement methods, amongst which the former is the most commonly used one.
Apart from this, the insurance should also provide for crucial financial goals, such as a child's higher education and marriage. These are one-time expenses and their present cost should be taken into account while calculating the cover. The table on the left shows you how to calculate your insurance needs.
What online term plans offer
While a large number of Indians continues to invest in insurance-cum-investment plans with an eye on tax benefits, the advent of online term plans has slightly tilted the scales in favour of protection plans. These online policies are 20-30% cheaper than their offline counterparts.
Many insurers are now selling term plans only through the online channel. You can buy these covers directly from their websites or through aggregator portals.
The premium of these policies is so low because there is no intermediary and because the online buyer is perceived as a low risk customer. He is educated, earns reasonably well, is concerned about protection and is likely to have health insurance as well. In case of a medical emergency, he may be able to quickly reach a hospital and access specialised medical treatment. These factors combine to lower the risk for the insurer.
This is an article written by PREETI KULKARNI on OCTOBER 26,2015 which published by The Economic Times.
Agents try to dissuade online buyers, saying such policies don't get good service from companies. This is not true. The online customer can expect the same quality of service from the insurance company as any other customer. When a claim is processed, there is no differentiation between a policy bought online and one purchased through an agent. Besides, all insurance companies have to comply with the rules laid down by the insurance regulator Irdai.