If you are a cricket buff like me, odds are high that you would be watching the T20 World Cup matches late at night. Do you know apart from waking up till late, what else I don’t like about this T20 World Cup? It’s the Term Plan advertisement aired on TV between overs during every match.
The question asked is how much minimum term insurance coverage you need. And pat comes the reply: “10 times your annual earnings.” If you check on YouTube, many influencers suggest a minimum cover of 15-20 times annual income.
“Make things as simple as possible, but no simpler” is a quote often attributed to Albert Einstein. It’s often used to encourage making a subject easy to understand, but not so easy that it becomes meaningless. These advertisements are doing the same thing. They are simplifying it so much that it loses its significance.
So, what should determine your term insurance cover? I would say, broadly three things: financial situation, family expenses, and life goals. However, you should also factor in inflation, besides considering large future expenses and investments such as your child’s education and parents’ healthcare needs.
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If you are a perfectionist, you may use the human life value calculator that does this calculation in a much more organized and practical way. However, for most people who are not that sophisticated, there should ideally be a good balance between how much you can afford and how much you need.
We should avoid extremes on both ends. Just because your income is low, you should not ignore or under-cover for term plan. Similarly, just because your income is very high, you should not over-cover for a term plan.
Let me share an example to prove my point. If you are a boot-strapped startup founder, there is a high probability that you are drawing either no or a meager salary from your business. If you draw only ₹50,000 per month ( ₹6 lakh a year), do you think 10 times of that (60 lakh) is enough to secure your family? Probably not. So, you may have to go beyond that 10x rule here.
On the other hand, if you are the CEO of the highest paying AMC and get a ₹50 crore-plus annual salary, should you compulsorily take a term plan coverage of ₹500 crore?
To sum up, I would say, the following 5 simple rules can be a good guide:
- A term plan is a must for the income earner of a family.
- Decide your coverage amount based on your financial situation, family expenses and future goals.
- Never forget to factor in the impact of inflation on your family’s needs.
- Don’t go to the extreme. Keep a balance between what you can afford and what you need.
- Start as early as possible.
The sixth, and probably the most important rule, is that don’t fall for oversimplified calculation.
