Life Insurance Misconceptions Debunked: Top 8 Common Fallacies Uncovered
In the realm of life insurance, term life policies stand out for their affordability and high coverage compared to other policies. With a term life insurance policy, you can secure a substantial sum for your dependents at a low cost, providing financial security in the event of your untimely demise.
At ETMONEY, a term life insurance cover of Rs 1 crore comes at a yearly cost of only Rs 10,000 to 17,000, making it an accessible option for many. But how do you determine the appropriate term life insurance coverage amount for your unique circumstances?
The most common and practical approach is to estimate the total financial support your dependents will need in your absence. This typically involves:
- Income Replacement: Multiply your annual income by a factor, commonly 10 to 20, to cover lost income over the needed years. For instance, if you earn $60,000, coverage of $600,000 to $1.2 million might be appropriate depending on how many years your family needs support[1][2][5].
- Adding Debt and Expenses (DIME Method): This widely used method accounts for debts (credit card, loans), income (multiply income by years of support needed), mortgage balance, and education costs for children. Summing these elements gives a broader estimate tailored to your actual liabilities and future costs[1][2].
- Years Until Retirement: Multiply your current annual income by the number of years until you plan to retire. For example, if you’re 35 and plan to retire at 65 with a $60,000 salary, you might need $1.8 million coverage (60,000 x 30)[1][3].
- Human Life Value (HLV): This method calculates the present value of your future income after subtracting future personal expenses and liabilities, representing your economic worth to your dependents[3][5].
- Standard of Living Method: Estimate the amount your family would need annually to maintain their lifestyle (e.g., a 5% withdrawal rate), and calculate coverage sufficient to support that income through the needed years[1].
Key factors to consider in your calculation include outstanding debts and liabilities, future financial goals, family living expenses, years of financial dependency, retirement planning, and policy tenure[4]. Online term insurance calculators often incorporate these factors in simplified forms, helping refine coverage amounts based on age, income, debts, and goals[5].
It is essential to remember that term life insurance is not only for married individuals or those with children; it is also important for those with debts or dependent parents. Buying a term life insurance plan online is a simple process that can be completed with a few clicks, such as through the ETMONEY app.
Term life insurance provides a much higher sum assured in case of the policyholder's death for a similar premium amount compared to traditional policies. However, it is crucial to note that term life insurance does not provide a lump sum amount at maturity, but it is not a waste of money as it provides death benefits.
In summary, use a combination of income replacement (10-20 times your salary), plus debts, mortgage, education, and future expenses, aligned with your planned policy tenure, to determine the appropriate term life insurance coverage amount tailored to your family’s needs[1][2][4][5]. The balance between the amount your family would need when you are not there and your existing wealth is the coverage that you would need as term life insurance.
In the last financial year, a maximum of 15 out of 100 policies had their claims rejected. Term life insurance is the most simple and essential life insurance product. As per the IRDA's annual report, the average death claim settlement ratio of insurance companies ranges between 85.3-99.07 percent[6].
While the number Rs 1 crore for term life insurance is a well-marketed figure, it is not calculated in a scientific manner. Today, term insurance plans can be customised as per individual needs, with options like adding riders, return of premium, increasing or decreasing term life insurance, and convertible term life insurance.
Sources: [1] https://www.investopedia.com/terms/t/term-life-insurance.asp [2] https://www.forbes.com/advisor/life-insurance/how-much-life-insurance-do-i-need/ [3] https://www.nerdwallet.com/blog/insurance/life-insurance/how-much-life-insurance-do-i-need/ [4] https://www.policybazaar.com/life-insurance/how-to-calculate-life-insurance-cover-amount [5] https://www.bankbazaar.com/life-insurance/how-to-calculate-life-insurance-cover-amount.html [6] https://www.irda.gov.in/uploads/annual_report/annual_report_2020-21.pdf
- In considering personal-finance matters, it's crucial to remember that term life insurance isn't exclusive to married individuals or those with children. Even individuals with debts or dependent parents can benefit significantly from such a policy.
- To manage one's personal-finance effectively, it's advisable to consider mutual funds as an investment avenue for long-term financial goals alongside appropriate insurance coverage, such as term life insurance.
