Let us now understand with the help of an example, why non-term traditional life insurance plans, like endowment plans, money back plans, pension plans etc are detrimental to your life insurance objective. Let us assume you are 30 years old and your annual income is र 20 lacs.
How much life insurance is adequate for you?
To get a proper estimate of your required life insurance cover, you should factor in, how much debt you have, how much monthly income your family needs to meet their expenses and future expenses of your family, like children's education, marriage etc. For the sake of simplicity let us go with a rule of thumb which suggests that your life cover should be at least 10 – 12 times of your annual income. B
ased on your annual income of र 20 lacs, you life cover or sum assured should be र 2 crores. Estimating your life cover is one thing and being able to afford it is another. Let us come to affordability now. Assuming your annual income is र 20 lacs, your estimated net monthly income after mandatory deductions like Provident Fund and income tax, will be around र 1.2 lacs. Let us assume that after paying for all your normal monthly expenses like rent / EMI, food, utilities, transportation, school fees etc, you are able to save 30% of your net monthly income. Many readers would agree that 30% is a very healthy savings rate. Most people are able to save less than 15 – 20% of their monthly income. Assuming you are able to save 30%, in this example, your monthly savings will be र 36,000. This is the amount you have for investment and insurance. Let us now assume you want to buy a non term traditional life insurance policy. As discussed earlier, your ideal life cover or sum assured should be र 2 crores. Based on premium rates of one of the largest life insurance companies in India, your annual premium for an endowment policy of 20 year term and र 2 crores sum assured, will be र 10 to 11 lacs. Since your monthly savings is र 36,000, naturally you cannot afford a र 2 crores sum assured policy. So how much can you afford? Let us assume that you are ready to pay a premium of र 25,000 per month or र 300,000 per annum. With an annual premium of र 300,000 per annum, based on premium rates discussed above, you can buy a 20 year endowment policy of र 60 lacs sum assured. In the event of an unfortunate death, your family will get the death benefit of र 60 lacs.
Let us assume that your family invests the money in a risk free assured return fixed income product yielding 8%. Assuming you have no loans, your family's annual income will be र 4.8 lacs or र 40,000 on a monthly basis. Under normal circumstance, you spend र 80,000 – 85,000 on a monthly basis for your normal expenses. But in the event of an untimely death, your family has to survive on less than half of that amount. Just imagine the lifestyle hardships your family has to endure and the sacrifices they will have to make. If you have a loan, the financial distress gets much worse. There is no doubt in this example, that your decision to buy a non-term traditional insurance cum savings plan has left you underinsured. Buying a non-term plan therefore severely compromises your life insurance needs.
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