Inflation Is Changing Insurance Needs. A 1 Crore Term Insurance May Not Enough

Sep 03, 2019 | 2 months ago | Read Time: 4 minutes | By iKnowledge Team
Inflation Is Changing Insurance Needs. A 1 Crore Term Insurance May Not Enough

The insurance sector in India is projected as a promising market all over the world, owing to the country’s large young insurable population and the consumers’ growing need for protection and social security. The industry is slated to grow due to a range of factors, including structural rise in financial savings, high protection gap as well as rapid penetration of digitization.

Though the insurance market is progressing, consumers are a little apprehensive due to the sharp acceleration of inflation, which is also on an upward trajectory. In June 2018, almost 5 percent inflation was recorded [1]. This means that insurance holders need to make requisite revisions to ensure greater coverage.

How our Insurance Needs are Dynamic

Inflation is, of course, a pressing concern, but come to think of it, our financial situation is dynamic, and it keeps changing every year, also due to our lifestyle and age. Ideally, it is said that the sum insured should be about 10-12 times your annual income, after subtracting assets and adding liabilities. Now, these computations can be easily put off balance due to rising inflation and its effect on your living and consumption pattern.

Let’s take an instance here. Say you are 35 now and your annual salary is Rs 35 lakh, then your insurance cover at least needs to support your family for the next 25 years (assuming retirement is at 60 years), in case you die today. If your life insurance premium is Rs 15 lakhs, then your family is due to face a shortfall of Rs 20 lakhs. If this shortfall is then capitalized at a rate of 8.5 percent/annum (after factoring in inflation at 6 percent) for 25 years, then your cover should ideally be around Rs 3.8 crore.

Now even though you might think a sum of a crore is huge, it might not serve your needs in the long run.

How to Decide your Cover Size

One of the simplest ways to decide on the cover size is to multiply your annual income by 10. For example, if your annual salary package is Rs 30 lakh, then your insurance cover should at least be Rs 3 crore. If the interest income earned on this amount (at an assumed rate of 8.5%), it will fetch your family an income of Rs 25.50 lakh every year.

Since healthcare and education generally witness higher inflation rates than other consumable items, it is best to keep in mind an action plan to meet these costs in the future. It may also require you to save a little more now by investing in term insurance policies or even altering your lifestyle to more sustainable patterns.

What is a term insurance plan and what makes it different from other life insurance policies?

A term insurance plan is a type of insurance, wherein the sum assured is given to a beneficiary, in case something untoward happens to an insured policyholder. Most people buy an insurance plan for the sake of investment, instead of protection. With most insurance plans, one gets money even if nothing has happened to you, and in case something has, you get a certain amount. On the contrary, in term insurance, you get the entire sum assured when an eventuality strikes the insured policyholder, and at the same time, you get greater coverage at a lower premium. 

Trusted insurance providers like Aegon Life offer plans where you get cover for up to 100 years, which means you can secure your family for a longer term. Besides, you can opt for either a monthly or annual premium on them. Plus, these premiums are low even if you opt for additional benefits.

How about an incremental insurance plan?

With rising inflation costs, even if we purchase a 1 crore term insurance, the sum assured might not suffice 10 to 15 years later. Generally, a term insurance can be treated like an agreement for 20-30 years. If you are looking at securing your family in case of an unforeseen circumstance and ensure adequate coverage, then incremental term insurance is the right option. Here, the sum assured increases annually by some percentage to ensure financial protection of your family even in dynamic environments.

In term insurance, the premium is fixed throughout the tenure, but if you choose to buy an incremental term insurance plan instead of a normal one, then you pay a higher premium. But there’s no need to worry, because the overall premium remains unchanged during the policy term.

Since insurance is still considered a traditional product, most people are unaware of the flexible options service providers like Aegon Life offer. It’s best to opt for such flexible plans instead of fixed ones, so that your insurance cover adapts to changing life situations.

What types of riders are available on these term insurance plans?

You can choose from a range of riders that suit your requirements. For instance, there is a critical illness rider that offers coverage during critical illness and comes with accidental death benefit. If someone meets with an accident, his/her family receives double the sum assured. Similarly, there are other riders too, which are also applicable to incremental term insurance plans as well.

The term life insurance market is competitive and customer-centered to ensure you can choose the best option for yourself. Some of these provide you with the option to increase your sum assured at different life stages. So, take your time and choose the right plan suited to your needs!

Citations:

[1] https://www.business-standard.com/article/news-cm/cpi-inflation-rises-to-5-in-june-2018-118071201041_1.html


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