Not buying enough coverage to replace income

While buying term life insurance, the topmost question in our mind is? how much cover do I need? Though a very popular number these days for term life insurance policy is Rs 1 crore, it is a random number without any proper math behind it. 

The things that need to be considered while arriving at an amount of coverage are? future household expenses (it should be 15 times your current monthly expenses), your liabilities, important goals, and life events, and if married, then a retirement corpus for your spouse. 

First, calculate the total amount your family would need considering all the factors mentioned.

Next, if you have any financial assets? mutual funds, provident fund, fixed deposit, etc. ? deduct that from the amount needed. This is the easiest way to come to a number while determining your term life insurance coverage.

Do not pick a random number no matter how big it sounds, instead, do your math correctly to find out how much coverage you would need.

Waiting too long to get a term insurance cover

Waiting too long to get term life insurance means that you would be leaving your family vulnerable to the fact they would have to go through financial hardship in case of your untimely death. Plus, term life insurance gets expensive if you buy it at a later life stage. Also, if you start late, the total amount of premium that you would pay over the years would be much higher than if you buy early. 

For example, if you buy a Rs 1 crore term plan (till the age of 75) at the age of 30, you would pay a premium of about Rs 10,000 every year. That is, you would pay Rs 4.5 lakh in total. But, if you buy the same plan at 45, you would be paying a yearly premium of around Rs 30,000 The amount you would pay toward the term plan in the next 30 years would be Rs 9 lakh.

So, ideally, you should buy term life insurance soon as you start earning. 

Getting term insurance for too short/long period

If you buy term insurance for too short or a too-long period it completely loses its purpose.  Let’s see how. 

Let’s assume you buy a 20-year policy at 30, and its tenure would end when you are 50. At that stage, you still would have several milestones to be achieved like children’s higher education, their marriage, a sufficient retirement corpus for your spouse, etc. These goals need to be protected until they are achieved. 

Similarly, buying a term life insurance policy for too long a tenure is also pointless. Suppose you have bought a term life insurance policy that will provide you cover till you are 80, but you retire at 60. There are two points to consider here. Considering the life stage, most of your life goals would have been achieved by then, hence life insurance requirement is not high. Second, you have to keep paying the premium amount for 20 years, even though you will stop working. 

Not reviewing term life insurance cover

You might believe that the term life insurance policy coverage that you have is enough for life, but that’s not the case. What may sound sufficient today, might not be adequate for your future needs. 

Hence, it is necessary to review your term life insurance every couple of years, reasonably every 10 years, to check whether it still matches your requirement. Then if you feel your life insurance needs are more than the coverage, you can buy another policy to fill that gap. 

Situations when you need to review your term life insurance policy: 

• Change in your income level
• When you take a big loan like a home loan
• When you get married
• When you have a child
• When your parents or spouse stops working
• If anyone in the family (other than you) has contracted a major illness and household expenditure goes up due to treatment