Smart ways to know if your life insurance cover is enough

By Sunil Fernandes
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    Smart ways to know if your life insurance cover is enough
    The Indian investor is obsessed with returns. We are constantly looking at ways to multiply our savings, which explains why we are easy prey for fraudulent schemes that promise the moon. Even when we exercise prudence and stay away from scams, we have a tendency to look for returns in everything. But while this is perfectly okay in the world of investments, it is the wrong way of approaching life insurance.

    The point to remember is this: Insurance is not an investment. Regardless of the unit-linked and other returns-based plans that your life insurer may offer, insurance is not the ideal way to go about growing your savings-the returns are just too low. Furthermore, in your bid to combine insurance with investment, thereby killing two birds with one stone, you could end up having too little insurance cover: You will be paying higher premiums, but getting low returns and an inadequate death benefit.

    The problem of underinsurance arises from a faulty approach to life insurance purchase. Many of us buy life insurance at the last minute, during the final mad rush at the end of the financial year. The goal may be to buy insurance, but the bigger goal is to save tax. But remember this: Conflating insurance with tax saving is a mistake. While insurance is a good way to save tax, the extent of your insurance should depend not on the amount of taxable income that you have to invest but in the actual life insurance needs of your family.

    Insurance buyers must also guard against mis-selling. Insurance agents are known to intentionally or unintentionally sell unsuitable products to customers. But if you do your homework, mis-selling will hardly be an issue for you.

    How to determine whether your life insurance cover is adequate

    It all begins with a needs analysis.

    1) One way is to calculate all your liabilities, goal-oriented expenses (like capital for a business or your child's education), and all expenses right up to your retirement. The accumulated sum would represent your adequate life cover.

    2) Another way is to estimate your human life value-i.e. calculate your future income and subtract all liabilities, expenses, etc., again, right up to retirement.

    3) If these calculation methods seem too complex, an easy way is to multiply your current salary by 10. The resulting sum would be your required life cover.

    If your current insurance is lower than estimated by any of these methods, consider increasing your coverage right away.

    It also helps to account for inflation. If you cannot quite work it into your calculations, there are increasing term policies that raise your overall cover by a certain sum each year, often in return for a corresponding increase in your premium.

    Give some thought to term insurance

    The problem with buying investment-linked insurance products or even whole life products is that you pay much higher rates for a relatively low cover. A better way would be to purchase term insurance, which offers far greater coverage for considerably smaller premiums. When the term ends, you will not be getting a payout. But if you have invested the money saved on premiums in other, more growth-oriented instruments (like mutual funds or even PPF), you should be able to grow your investment in a better way.

    Written By:  Deepak Yohannan
    The author is the CEO of, an online insurance price & features comparison portal
    For more articles by Deepak Yohannan, please visit
    You may contact him directly on Twitter: @dyohannan

    Read more about: term insurance
    Story first published: Monday, July 21, 2014, 9:49 [IST]
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