So you’ve planned ahead and bought a life insurance policy. And why wouldn’t you?
Firstly, it can support your family financially in case something untoward happens to you suddenly.
Secondly, it eases your loved ones’ financial burden in times of loss.
Thirdly, it is a good personal finance risk management tool.
But, do you know that just buying life insurance is not enough to take care of your family?
Consider this; you meet with an accident and are critically injured. You have sufficiently provided for your family with term cover of Rs. 1 crore which you think will cover all their financial needs.
But What if it’s Not Enough?
Their requirement in terms of money may have increased from the time you first took your policy. If you forget to review your life insurance needs as things change, you may forget to include the home loan taken on after the insurance or forget to take into account your children’s goals.
Proactively reviewing the life insurance cover and assessing if there is a need to change the sum assured is an absolute must.
Here are some pointers to review your life insurance policy.
When Should you Re-evaluate Your Insurance Needs?
Any big family events call for a need to review the life insurance. For example, if you’ve just gotten married or added child number two, then you need to review the cover amount as the number of your dependents has increased.
When you take on higher liabilities, the repayment burden of which falls on your family in your absence, requires a review of the coverage amount. Another instance is when your career or income levels change, resulting in your family getting a level up in terms of lifestyle. When your family is used to a certain kind of lifestyle, it would be very difficult for them to lower their expenses in your absence.
Reviewing your life insurance is also required when you hear bad reviews about your insurance company. In this case, the review would be to assess if you should change your insurer, rather than looking at the amount of cover you need.
How Should you Review Your Life Insurance?
A review on life insurance often refers to critically analysing the amount of coverage you have purchased and evaluating if this is sufficient to take care of your family’s needs when you are not around.
First, take into account all existing liabilities in your name. A big liability would be a home loan. Next, determine the corpus needed for critical goals in the family, such as your children’s education and marriage. It is not recommended to consider goals, like an international vacation or a purchase of car, for this purpose. Then, calculate what would be the income replacement once your income stops. This means that they should be able to manage the monthly expenses in your absence.
An important factor to consider while calculating your insurance needs is to look at inflation. This is because expenses are constantly on the up and go.
When you have calculated your requirements, compare this with the actual amount of insurance you hold. Any shortfall would require you to purchase a bigger insurance cover. While it is good to be prudent and cover all your family’s needs, it is foolish to unnecessarily purchase a large cover and consequently pay a hefty premium. A fine balance should be struck between the insurance needs and the cost of the insurance policy.
What Should be the Ideal Amount of Coverage?
There is no standard ideal amount of coverage which can be stated for all individuals. Two families of the same size may need different life insurance covers because of a difference in their lifestyles. Similarly, two families with the same lifestyle may need different amounts of coverage because of the number of dependents in each family. Therefore, there is no ‘one size fits all’ approach when it comes to life insurance.
Additional read: No-Brainers Before You Take Insurance
While purchasing a life insurance cover is a good practice, this is only the first step in your risk management activity. Regularly reviewing your needs in light of changing scenarios will finally render your policy useful in times of need.
So, have you covered yourself sufficiently?