One of the first things you should do in your financial planning journey as soon as you start earning is to buy an insurance cover.
There are many benefits in buying a life and health insurance cover early in your working years. You will have to pay a lower insurance premium as against, say, buying one for the same amount a few years down the line. Besides, chances of being rejected are also low. As you age, you might have to undergo tests before the insurance company decides to insure you.
But more than choosing the right insurance policy, you need to determine the right amount of cover that you actually require given your existing expenses, liabilities, responsibilities and future needs.
It is here that the life insurance calculator by the Securities and Exchange Board of India (Sebi) could come in handy. It provides valuable insights that can help you make informed decisions on buying the right amount of insurance cover that you require.
To narrow down on the adequate coverage that you need, here are a few important things you need to consider.
Family’s Financial Needs: To start with, assess your daily living expenses, outstanding debts, such as home, vehicle or personal loans (if you have any), and other expenses.
Income Replacement: This is very crucial as the entire premise of insurance coverage depends on this factor. Determine the amount your family will need to maintain the current lifestyle if you were to pass away prematurely.
Specific Financial Goals: Next, plan for your future financial goals, such as funding your children’s education, loan repayments and others, by factoring in estimated expenses.
Existing Liabilities: Consider any existing liabilities, such as personal, home, or vehicle loans or credit card debts, and ensure that your life insurance coverage is enough to clear these obligations, too, in the event of your untimely demise.
Inflation and Future Expenses: It’s equally important to account for inflation and future expenses when calculating the required amount of insurance cover. What may seem sufficient now might fall short in the future due to rising costs. So, take these into consideration, as well.
Additional Benefits: Though you should consider additional benefits, such as critical illness cover or disability benefits, but experts suggest that you should not blindly go for such riders, as many of them are oriented in favour of the insurance companies.
Policy Tenure: Lastly, decide on the policy tenure based on the time it will take for your dependents to become financially independent. That way, you will be able to zero down on the right amount of insurance coverage that you will require.
Sebi’s Calculator
The Sebi calculator ‘https://investor.sebi.gov.in/calculators/Insurance_Calculator_YoungEarners.html’ takes all these factors into account and provides a comprehensive analysis of the required coverage for young earners.
The provided values are for calculation purposes and can be adjusted in the calculator, as needed.
For instance, in the first column, the calculator will consider the monthly income needed by your family in case of your absence. For instance, if you enter ‘Rs. 28,000’, it will calculate the required sum to generate an inflation-indexed monthly income over (28 years), considering an annual inflation rate of (6 per cent).
The calculator will also take into account the sum needed to clear existing liabilities and subtracts usable assets from the total coverage required. For instance, if you have a liability of Rs 50,000, the calculator will take that into account as well.
Based on these calculations, the calculator will suggest a cover of Rs. 76 lakh, which can be used as a benchmark to review your current insurance amount, especially if you do not have children.
For individuals with children, Sebi provides another calculator.
Further, there are various types of insurance policies, including endowment policies, money-back policies, unit-linked insurance plans (Ulips), and term insurance policies that one can choose from.
Term insurance offers no maturity benefits, meaning you won’t receive anything at the end of the policy’s tenure. However, in case of your demise during the policy term, your nominees will receive the sum assured and the death benefit as mentioned in the policy documents.
Typically, term insurance policies provide a higher amount of coverage for the given premium as compared to other types of policies.
In all, by leveraging Sebi’s life insurance calculator, young earners can make well-informed decisions about their life insurance needs, thus ensuring their loved ones are financially secure even in their absence.
