How much term life insurance cover do you need? When should you buy? Here’s what experts say

Having a life insurance policy could be helpful in avoiding a financial crisis in case of an unexpected . A life insurance cover may work as a shield against financial crisis in case of the death of the earning member of a family. The insurance policy will provide the much needed financial support to meet several liabilities like any existing debt.  Life insurance plans come cheaper when you buy a plan at a younger age. The older you get, the insurance coverage becomes more expensive. However, there is a lot of confusion among many individuals about some important factors like how much insurance cover they should opt for, the kind of policies to buy and the right time to purchase an insurance plan.

Industry experts like Tarun Chugh of Bajaj Allianz Life Insurance, PB Fintech’s Sarbvir Singh and Amit Jhingran of SBI Life Insurance shared their insights and tips on buying life insurance plans on the ‘Insurance Show’, a special programme launched by CNBC-TV18 in collaboration with Policybazaar.

Sarbvir Singh, the Joint Group CEO at PB Fintech, said that first-time insurance buyers should purchase term insurance policies. He added that to find out the right amount of term -insurance they need, they should multiply their annual income by 10 and add any liabilities or loans that they have to it.

“The first thing you must do is to ensure that you have a term insurance policy which pays off in case you're not around and makes sure that your family can live a proper life. Now, to calculate the right amount of term insurance that you need is to look at your income. A useful rule of thumb is to look at it as ten times your annual income; secondly you should also calculate your liabilities, like a home loan. So, when you add these two up then you get the amount of term insurance that you need,” Singh told CNBC TV18.

Tarun Chugh, Managing Director and CEO at Bajaj Allianz Life Insurance said that life insurance should be bought as and when the buyer feels that they have responsibilities on them and have stable earnings.

“Whenever you have some responsibilities and you have started earning, that's the best time to buy term life insurance because your family is dependent or somebody's dependent on you, hence your being there is very critical, so you take a term life policy,” Chugh said.

Chugh added that the sooner life-insurance is bought, the cheaper it becomes. He suggested that the insurance cover should be increased when significant life events happen such as marriage, birth of a child or getting a promotion.

“The sooner you buy life insurance, the cheaper it is. See there is a value for money bit that comes in. So, for example if you are a 30-year old buying a ₹1 crore cover on a regular paying policy, you will pay around approximately ₹10,000 per annum and if you're a 50 years old who's going to buy that policy, you'll pay three and a half times of that. Suppose you had a child, got married or had a second child or got a very significant promotion all these times you should add to further covers,” Chugh advised.

He also explained the importance of Credit Life Insurance. He added that this type of life insurance policy is a single premium policy, taken through a bank which takes a master policy for its loan holders and converts that policy into Equated Monthly Instalments (EMIs).

“Whenever there is a credit that you take there for home loan, car loan, it is a liability. So, if something happens to you and you're not able to pay then your family is actually in a minus, they'll have to survive without that asset because you'll have to return the asset or you'll have to pay the loan back. Credit life insurance is a single premium policy which is taken through a bank which is basically taking a master policy for all its loan holders and it converts that policy into an easy EMI so it wraps it around your loan so if your loan was let's say ‘X’ then it'll become X Plus a little bit,” Chugh said.

Chugh also highlighted the two kinds of annuity life insurance policies that exist. He said that in an immediate life annuity policy, the policyholder pays a lump-sum amount and is then given a pension every month from that amount. Chugh also talked about deferred annuity plans where one can start investing in their insurance policy at 40 and pay a monthly amount.

Explaining the need for annuity policies, Chugh said that with improved life expectancies, there’s a risk of not having any income post retirement. He said that the returns on annuity plans are the same as Government Securities (G Sec Bonds) and range around 7%. Chugh mentioned that the lack of social security in India for the elderly increases the need for annuity.

“Today, you may be earning for let's say 25-30 years but when you retire you may be alive for 30 years. The average Indian living till 60 nowadays lives till about 82-84 years and in the cities, you are not going to get any salary for those periods so hence it is a very important risk to cover. The return ballpark is a G-Sec rate so you can get around 7%. Getting a fixed return and not letting the risk of reinvestment hit you for 50-60-70 years of age till you're alive, particularly in India where we don't have social security, becomes a very important risk to cover,” Chugh said.

Amit Jhingran, MD and CEO at SBI Life Insurance, emphasised the need for annuity for social security and post retirement income. He added that annuity income is taxed as per the tax slab of the income and that no capital gains tax is charged on the income.

“In India where social security is one issue post retirement income is very important and everybody should plan to have a proper income as per their lifestyle needs for their post retirement and take a particular annuity policy. As far as taxation is concerned this income of annuity post retirement is added to your regular income and it is taxed as per the applicable slab that you are falling in. There is no capital gains on this product so you should plan this income as per your regular income and pay tax as per your regular tax slab,” Jhingran told CNBC TV-18.

Moneycontrol journalists were not involved in the creation of the article.