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Home Articles How To Select Best Life Insurance Plan According To Income?

How To Select Best Life Insurance Plan According To Income?

IndianMoney.com Research Team | Updated On Thursday, September 06,2018, 01:48 PM

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How To Select Best Life Insurance Plan According To Income?

 

 

 

Many people don’t understand the importance and power of adequate insurance. A life insurance for instance, is important to protect your family, financially. Many people in India are under insured. This means they avail life insurance, but the sum assured is not sufficient for self and family. Many citizens don’t explore life insurance products.

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How To Select Best Life Insurance Plan According To Income?

Many citizens avail endowment life insurance, as they think it gives higher tax benefits compared to a term life insurance policy. Take the example of Roshan, who is a 30 year old IT employee earning Rs 7,00,000 a year. He doesn’t know which life insurance to avail, endowment or term insurance?

 

Let us help him with the premiums:

  1. If he opts for an endowment policy with a sum assured of Rs 10,00,000 and a policy term of 15 years, he will have to pay an annual premium of Rs 70,000. On maturity, he will get a sum assured of Rs 10,00,000 + Bonus.
  2. Guaranteed Bonus: This is a percentage of the sum assured for the first few years of the policy, say 3.5% for 5 years.
  3. Reversionary Bonus: This is paid out of the profits of the insurance company. No reversionary bonus if there are no profits.
  4. Terminal Bonus: This is a loyalty bonus paid in the final year of the endowment plan.
  5. If he opts for a sum assured of Rs 1 Crore in a term life insurance plan for a term of 30 years, he will have to pay an annual premium of Rs 12,000. If he dies within the policy term, his family will get Rs 1 Crore in death benefits. If he survives the term, the insurer will not pay any amount.

 

SEE ALSO: Top 5 Reasons To Buy Term Life Insurance In Your 30s

 

Now, Roshan would want to avail an endowment policy for two reasons:

  • He is sure of getting insurance money after 15 years.
  • He will save a huge chunk on tax (a whopping Rs 70,000 a year).

 

Availing an endowment plan does seem wise. In reality, it isn’t. Roshan will pay high premiums for a low sum assured on the endowment plan. Though he’ll get the sum assured on maturity, it is not sufficient to cover his family. If something untoward happens to him within policy tenure, how much will his family get from the endowment policy?

He will only get the sum assured of Rs 10,00,000 + guaranteed bonus + reversionary bonus (if any). The insurer will not pay him any terminal bonus because it is only paid on maturity of the plan. Say he is married and has two children, his spouse is a homemaker and his parents are dependent on him. Will this amount be sufficient to take care of family needs?

Had he availed a term life insurance, his beneficial nominees would have got Rs 1 Crore.

Therefore, it is best to avail a term life insurance plan. As income increases, you can avail an additional term life insurance policy or an endowment plan as per financial goals.

When it comes to availing a term life insurance, insurers look at your income. You won’t get a term insurance of Rs 1 Crore, if you are earning only Rs 3,00,000 a year. Ideally, term insurance should be 10 times your annual income. When income increases, you can buy additional term plans.

Learn how to select the best life insurance plan according to income:

Don’t blindly avail a life insurance plan. Do your research. Decide on an appropriate sum assured that goes with your needs. You can arrive at this figure by calculating daily expenses and outstanding financial liabilities (debts). Do consider children’s education and wedding expenses, desired retirement corpus, etc.

 

Consider the following:

  • Let A be your current monthly expenses of Rs 35,000. Don’t include investments and savings. Annual income is Rs 6 lakhs before tax deductions.
  • Let B be inflation. Assume a figure of 5%.
  • Let C1 be your current age which is 40 years.
  • Let C2 be your retirement age in years. Say you want to retire at 60 years.
  • Let C be the number of years to retirement. C = C2 – C1, i.e. 60 – 40 = 20 years.
  • Let D be the large expenses that come up later in life, like a child’s wedding expenses after 15 years, higher education expenses after 10 years, medical expenses and so on. Remember to factor in inflation. If education costs Rs 5 Lakhs now, it will cost Rs 10 Lakhs after 10 years. If a wedding costs Rs 2 Lakhs now, after 15 years it will cost around Rs 5.5 Lakhs. Add all these expenses. If you have more than one child, consider their expenses too.  For this example, let us take large expenses to be Rs 17.5 Lakhs in total.
  • Let E be your existing savings. Add financial assets like bank balance, Fixed Deposits, Recurring Deposits, Government bonds to arrive at the total. Let us assume you have existing savings worth Rs 5 Lakhs.
  • Let F be your existing liabilities. They can be outstanding loans like Home Loan, Car Loan or a Personal Loan. Let us assume you have a Home Loan outstanding of Rs 25 Lakhs as of today. Include other debts like Car Loan, Credit Card outstanding, etc. Let us assume it adds up to Rs 25 Lakhs.
  • Let G be your existing Life Insurance Cover. If you have availed policies, consider the Sum Assured and not the premium of these policies and arrive at the total. Let us assume he has no life insurance.

 

To make calculation simpler, don’t include:

  1. Fixed Assets
  2. Post-retirement expenses

 

Term Life Insurance Cover Formula

 

Term Life Insurance Cover Required = [35,000*12*(1 – (1.05) ^20)/(1-1.05)] + 17,50,000 – 5,00,000 + 25,00,000 =  Rs 2,37,95,382.

You must ideally avail a Term Life Insurance Plan with sum assured that is 10 times current annual income.

If Roshan applies for a second term insurance plan, he has to inform the new insurer on his existing insurance plan. Term Insurance is a protection which should ideally cover your working life. While you might arrive at a higher sum assured figure after calculations, it is not absolute.

Remember, insurance is not an investment. So, it isn’t wise to be over-insured. The best thing is to get a decent term insurance cover and continue investing according to your financial goals and risk tolerance capacity.

 

Be Wise, Get Rich.

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IndianMoney.com Research Team

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