If you plan to buy a life insurance policy to secure the life of your loved ones, important questions you need to answers are:
- What kind of policy to buy?
- How many policies to buy?
- How much term insurance to buy?
If you have started looking for a policy and are confused around the above points, you are not alone. Most people are in a dilemma when it comes to buying the right insurance plan. If you are clear with your financial goals, you can get answers to the above questions.
To help you understand how to find answers to the above questions, we will take up a case study. You can replicate the same as per your financial situation and conclude.
Nitin is 34 years, lives in Pune with his wife, two children, who are six years and two years old. Nitin's parents also stay with him, and they both are retired. Nitin is the only earning in the family and earns Rs 1.2 lakh per month.
Assess your Family’s Financial Goals
Nitin has the following visible long-term financial goals:
a) Child Education
Nitin has two children at 2 and 6 years old. He needs funds for their education in the next 12 to 18 years, some lump sum amount every year.
b) Child Marriage
He also needs funds in the next 25 to 28 years for their marriage.
c) Retirement Corpus
He wishes to retire at the age of 60, so he wants to create a retirement corpus and regular source of income for his second inning of life such that he does not have to think about money post-retirement.
d) Foreign vacation
He wants to take his entry family for a foreign trip in the next three to four years.
e) Start a business for recurring income
Nitin has some land in his hometown. He wants to construct a house there and rent it out for regular income. He plans to start construction after 7 to 8 years once the area is developed. He is saving a small portion for this financial goal as well.
Assess your Family’s Immediate Liabilities
He also has two running loans with the following details:
1. Car Loan
a) He has a 5-year car loan of Rs 5 lakhb) EMI for the loan repayment is Rs 13,500 c) The loan tenure was for five years, and three years are pending
2. Home Loan
a) He has a 20-year home loan of Rs 35 lakhsb) He is paying Rs 30,000 as EMIc) He has about 16 years remaining for the loan
He has monthly expenses of Rs 40,000, and the remaining he is saving for different financial goals.
To sum up, Mr Nitin has a loan liability of approximately Rs 38 lakhs (without the interest amount). Along with it, some uncompromising financial goals and some aspirational financial goals.
Now let us look at two scenarios that could happen with him:
i. Nitin Lives a Long and Healthy Life – The Best Scenario
Nitin has about 26 years until retirement. During this period, his income will continue to grow and:
- He will save and invest his savings towards his children’s goals and his retirement
- He will pay off all the debt
- Along with his spouse, Nitin will retire at the age of 60 or 65
ii. Nitin Meets an Unfortunate and Early Death – The Worst Scenario
If Nitin dies in the next few years, none of his above financial goals would complete. Not only this, he will leave with a big loan liability for his family.
iii. Nitin Meets with Accident and is Disabled – Mezzanine Scenario
His earning capacity may be impacted, and he will have to reset his financial plan to the new reality. Plus, the family may have to incur huge medical costs and may have to modify his home.
Nitin’s financial safety needs require the following health and life insurance policies:
a) Term life insurance planb) Critical health insurance planc) Family Medical insuranced) Accidental disability cover
These policies will cover about 80% of his life’s financial emergencies caused by an external event. The remaining 20% are temporary contingencies like job loss, etc. Such emergencies will need an emergency fund of up to 6-month income.
How Much Term Life Insurance Does You Need?
Given the known financial goals and needs of Nitin’s life he should have a term life cover that can fulfil the following for the family in his absence:
a) Helps them meet their important life goals, like children’s higher education and marriageb) Provides for the regular expenses of the familyc) Helps them pay off the ongoing debt
Since all three are based on his income, his income will also decide the term insurance cover. Usually, 10 to 15 times the annual income is an adequate cover, depending on whether you have liabilities.
So, in the case of Nitin, his term insurance policy should be about 15 times his annual income, i.e. Rs. 2 crores.
With a term plan like iSelect Star Term Plan from Canara HSBC Oriental Bank of Commerce Life Insurance, Nitin can also choose an increasing cover to account for future growth.
How Much Health Insurance You Should Have?
Nitin will need two types of health insurance plans – one which looks after the cost of healthcare, and another, which assists financially in the case of a major illness.
While Mediclaim will include the entire family, the critical cover should be available to both Nitin and his wife. If Nitin buys the iSelect Star term plan he will automatically have the critical illness insurance cover. He can also add his wife under the same plan, even if she does not have a direct income.
Term life insurance and health insurance covers are not the only essential insurance plans you want to have. You also want to protect your children’s goals from any shortcomings due to your early demise or other contingencies.
You can create your financial goals, check your liabilities, and based on the data can pick the term plan, decide the cover amount and choose other plans to accomplish your other goals.