The economic conception of the world has changed over the years. Once 1 crore was a fortune, but now the value of INR 1 crore doesn’t amount to much. It is not the value of the denominations that have altered but rather the perception of that value subjected to inflation. Whether you get a 1 crore term insurance or a 5 crore term insurance, the value of the Indian Rupees at the time of the pay-out will determine whether or not it is adequate coverage for the wellbeing of your loved ones.
Why you need a minimum of 1 crore term insurance to secure your family’s future
The rate of inflation affects the cost of items. What costs INR 1000 today will increase in value due to the impact of inflation. In ten years, amounting to as much as INR 5000. The same principles apply to your life insurance policies as well.
Consider this scenario:
You evaluate the monetary needs of your beneficiaries and decide upon INR 50 lacs coverage on a policy tenure of 10 years. However, the value of INR 50 lacs in 5 years could be equivalent to INR 35 lacs only, depending on the impact of inflation. Therefore, in 10 years, the value could be reduced to half the actual amount. That means, if your family’s current financial needs amount to INR 50 lacs for a few months, then you need at least a 1 crore term insurance plan for 10 years to keep their needs met.
Normally, even INR 50 lacs is a decent amount, but when planning your life insurance policy, you need to consider the sudden expenses that may befall your loved ones in the event of your untimely demise. They may have loans to repay, mortgages to pay or rent, utility bills, household expenses, costs associated with education, business, etc., medical expenses, and a hundred other things that you may have even missed in your estimation.
Types of term plans to consider
Ideally, life insurance coverage should allow your loved ones to repay their liabilities, maintain their livelihood, and prepare for the future. Thus, they require coverage which should last a few months so they can plan for what lies ahead. When estimating the required coverage for your term insurance plan, you need to consider the current financial needs, multiply it by a few months, and then add the rate of inflation. It helps conjure a more realistic result for how much sum assured would suffice as a death benefit to help your family through tough times.
Keeping these subjectivities in mind, insurance providers have introduced different types of term insurance plans which are as follows:
- Increasing term insurance –
With this plan, you could purchase a 1 crore term insurance policy for a given period of time. Every year that you survive through the policy tenure, the sum assured of the policy increases by a certain percentage. Therefore, it helps account for the rate of inflation. So, in a way, if you live through years of your 1 crore term insurance plan, it could become equivalent to a 5 crore term insurance policy when your beneficiaries receive the death benefit.
- Decreasing term insurance –
Suppose you purchase a 1 crore term insurance plan. Every year, the insurance provider deducts a percentage of the sum assured. They use the deducted amount to repay loans that you have specified in the contract. Over the years, your liabilities reduce, therefore, when your beneficiaries receive the death benefit, the amount may be a lot less. After periodic deductions, your 1 crore term insurance could perhaps pay INR 30 lacs, having cleared a lot of debt. Your beneficiaries are free to use the 30 lacs to plan for their future instead of having to repay large loans, except for whatever liabilities remain.
These term insurance plans are excellent exit strategies for your loved ones. They can either receive an amount that is far more than they were expecting as a death benefit, or they could be rid of liabilities.
Now, consider in the above examples that you have term insurance for less than 1 crore. With an increasing plan, the sum assured could reach a 1 crore term insurance but the value of the Indian Rupee may not be the same. Ergo, the 1 crore death benefit still doesn’t seem enough to cover the expenses of your family.
Similarly, even the remaining settlement from a 1 crore term insurance with a decreasing plan, while beneficial in negating liabilities, would be much less. A 5 crore term insurance, on the other hand, could do wonders to help reduce the liabilities and still have enough left over for the settlement.
Conclusion
There are different term plans available with differing variables and benefits. Regardless of the type of policy you purchase, you need to account for the rate of inflation and the growing demands of mankind to provide sufficient coverage for your family.
