Uncertainty is part of life. Although no one likes to think about death, it is essential to be financially prepared to protect your family - should anything unfortunate happen. Having a proper financial plan will make sure that your family can lead a comfortable life - even in your absence. There are many ways to create a financial corpus for your loved ones, one of which is term insurance. It is a straightforward product and is the easiest way to secure your family’s financial future in your absence.
One of the major advantages of term insurance is that it offers large coverage at a relatively low premium rate. So, you may wish to get a large cover for your family to ensure they are adequately protected.
Today, many insurers and web aggregators offer term insurance with 2 Crore coverage at extremely affordable prices online. A large cover like Rs. 2 Crore may seem enticing.
But! Is this cover right for you? Will it meet your needs?
Read this article to find out.
What Exactly is a 2 Crore Term Insurance Policy?
A 2 Crore term insurance policy provides a sum assured of Rs 2 Crore. In case of your untimely demise, your nominee will receive Rs 2 crore as a death benefit.
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How Does a 2 Crore Term Insurance Work?
A 2 Crore term insurance works just like regular term insurance. You need to make timely premium payments to keep the cover active.
If you pass away during the policy period, the insurer will pay Rs. 2 Crores to your nominee. The claim amount will make sure that your family can manage their expenses and maintain their current standard of living - even in your absence.
However, if you survive the policy period, there won't be any payback.
Example: Kumar is a 28-year-old investment banker who lives with his wife, his 3-year-old daughter, and his retired father. His annual income is around 13 lakhs. Since Kumar is the primary breadwinner at home, the entire family depends on him financially. He also has outstanding car and home loans. In order to ensure his family's financial future, Kumar would need to invest in a term plan that offers at least Rs 2 crores as the sum assured.
The term insurance cover amount must be calculated according to your and your family’s requirements.
Case 1: Ravi is an MNC employee. His wife and a 5-year-old child are financially dependent on him. He has an outstanding home loan. Since he has few liabilities and fewer financial dependents, he calculated and determined that a 2 crore cover is sufficient for him.
Case 2: Mahesh is a government employee living with his wife, 2 kids and retired parents. All of them are financially dependent on him. He has an outstanding education loan and has recently taken a car loan. Since he has more financial dependents, more liabilities and expenses, he may need a cover of more than 2 crores. In any case, he shouldn't settle for a 2 crore cover - if he does, his family might be underfunded in the future.
How Do You Calculate The Right Term Insurance Cover Amount?
The cover amount must be sufficient to take care of your family’s needs and goals - in your absence. In order to find the right cover amount, you need to calculate the gap between what you intend to leave behind and your family's actual needs.
The basic thumb rule for calculating term coverage is 20X your annual income. Besides the thumb rule, here's another formula for calculating term coverage -
Cover amount = Amount you own - Amount you owe
- Living Expenses Fund
Short-term expenses such as groceries, monthly bills, school fees, and other necessities fall under this category.
- Major Expenses Fund
Long-term expenses such as children's education, weddings, etc. are included in this category.
- Major Liabilities Fund
Loans/liabilities you've taken, such as a home loan, an education loan, etc., are included in this category.
- Amount you own
The money you have at present, cash at the bank, investments including fixed deposits, mutual funds, stocks, etc fall under this category. It may not be possible to liquidate some of these funds right away. It is therefore necessary to multiply them by their necessary risk factors.
Here’s a table that enlists the risk factor for the respective asset -
|Existing life insurance policies
|Savings, cash, fixed deposits
|0% (Take them at zero value since they are high-risk investments.)
|Gold & residential property
|0% (Take these assets at zero value as you won't want your family to liquidate them to cover your everyday expenses.)
Make sure you factor in inflation of around 6-8% after subtracting the total amount you owe from the total amount you own to ensure that your family is sufficiently covered in the future.
So, once you’re done with the calculation, you will understand the financial gap you have to fill, which can be met with the term insurance policy’s cover amount. And you can buy a policy with that cover amount to ensure your family will be adequately covered in your absence.
Best Term Life Insurance Plans
This is all about 2 Crore term insurance. For some, a 2 Crore cover might be sufficient coverage, but not for all. Hence, ensure you take all the aspects discussed in this article into account when calculating the cover amount to arrive at the right figure. You also need to factor in inflation - so your family will always be adequately covered.