A Whole Life Plan is a long-term commitment. It covers you for the entirety of your life (till you’re 99-100 years old) while ensuring financial security for your loved ones. If you survive the policy period, it will pay you a fixed amount, and if you don't, it will pay your family a fixed amount.
When buying whole life insurance, the most crucial step is to decide the cover amount. To determine how much coverage you need, you need to identify your financial goals (child's education, retirement expenses, financial protection for your family in your absence). The decision should be carefully thought through because you don't want your family to feel stranded in your absence - especially if you have dependent family members or loans.
Another important point you should remember is that the cover you feel is adequate today might not be enough in the future due to rising living costs. Costs of food, education, housing, etc. will always be on the rise. Having an inadequate cover is equal to no cover at all since it won't help meet the purpose it was purchased for.
So, how do you calculate a cover amount right for you and your family? Let's find out in this article!
First, let’s look at the benefits offered by a whole life policy -
Benefits Provided By A Whole Life Policy
The death benefit will be paid to your nominee if you pass away during the policy term. It is equal to the sum assured you choose at the time of policy purchase.
If you survive the policy period, you will receive the maturity benefit. It is the sum assured you choose at the time of policy purchase. Whole Life Plans usually mature at 99 or 100 years of age.
Some insurers pay a survival benefit to you after you complete all your premium payments under the policy, i.e., at the end of the premium payment term.
Depending on the insurer, the survival benefit can vary. It may be -
- A percentage of the sum assured you choose
- A certain amount decided by the insurer
Example: Lalit, a 40-year-old, opts for a whole life cover of Rs 50 lakhs in 2022. The premiums are to be paid for the next 15 years and he has appointed his wife, Diya, as his nominee.
In his policy, the death benefit or maturity benefit equals the sum assured. And, the survival benefit is 5% of the cover amount which will be paid to him once the premium payment term gets over.
Let's see how the benefits will be paid out -
Maturity Benefit - If Lalit outlives the policy period, i.e., when he crosses 99 years of age, he will receive the lump sum amount of Rs 50 lakhs.
Death Benefit - If he passes away during the policy period, his nominee, Diya will receive the entire cover amount of Rs 50 lakhs.
Survival Benefit - Lalit will receive 5% of his cover amount as a survival benefit. So, he will receive Rs 2.5 lakhs. Lalit will receive this amount every year from 2037 until the entire 50 lakhs gets exhausted.
Now, let’s have a look at how you should go about calculating the right cover amount.
Things To Keep In Mind While Calculating A Whole Life Cover That’s Right For You
Your Future Financial Plans And Your Family's Needs
By evaluating your and your family’s needs and financial goals, you can determine the cover amount you need to achieve them. Typically, the decided amount should be sufficient enough to secure your family's future even when you are no longer around to support them.
For instance, if you have a dependent spouse, you need to consider all the expenses they will incur such as grocery bills, utility bills, paying off any loans you’ve taken, etc. If you have children, you will need to factor in their education and wedding expenses.
Your Current Budget For Premiums
A whole life insurance policy is a long-term commitment and to enjoy the benefits it offers, you need to pay the premiums regularly. So, ensure the premiums will fit your budget till the premium payment term is over. If you happen to exit the plan within just a few years, you may have to face heavy losses.
To determine the right cover amount, make sure you strike a balance between these two factors - a sufficient cover amount and premiums that are easy on your wallet.
How Much Coverage Do You Need?
A whole life insurance policy is intended to leave your family with a financial legacy, ensuring they will live comfortably in your absence. Make sure that the cover amount meets your family's financial needs such as your child’s higher education or wedding, loan repayments, and daily expenses like school fees, grocery bills, etc.
You need to have a holistic approach to calculating the cover amount you and your family will need, so your family’s financial future is well-protected even in your absence. Think about all the expenses you incur in your current lifestyle and calculate the cover accordingly, so you don’t fall short.
Here are a few steps to determine the financial security your family needs -
Assess Your Financial Responsibilities:
Calculate how much money your family will need to take care of their needs and financial goals.
How much money will they have to spend every month to maintain their current standard of living?
What are their long-term financial goals - say your child’s higher education or marriage expenses or spouse's higher education etc. Factor in an inflation rate of 6-8 % per year till the time you need this money.
How many loans and liabilities do you have?
Evaluate The Value Of Your Assets:
Now subtract the total amount you estimated in the above section from the total funds you already hold in the form of assets. The net result is your family's current financial gap.
Note: Make sure you only include liquidable assets and not non-liquidable ones. It makes no sense to add gold ornaments and the house your family lives in, when calculating your assets.
Factor In Your Existing Life Insurance Cover:
Now, subtract this net value from the amount of life insurance you already have.
Say that you already have term insurance. This policy is primarily aimed at covering your family's financial goals that are expected to occur during a specific period of time. And, once your term insurance expires, the whole life plan can cover the balance.
Every family has unique needs, so it's important to take them into account. Review your cover amount every few years to ensure you are prepared for any new or unplanned responsibilities.
Choosing the right cover amount is super important when purchasing whole life insurance. Each family has its own requirements, and it's important to take them into account when determining coverage. Ensure you pick the ideal coverage that is sufficient for today and in the future - so that you and your family are always protected.