The average thirtysomething in India is married, with a child - or planning for one - and possibly dependent parents. Not surprisingly, one of the biggest mistakes made by this age group is not buying life insurance. "India has a huge protection gap of 92%. This puts many families at the risk of financial stress, in case of the death of the breadwinner," said Vineet Arora, MD and CEO, Aegon Life Insurance.
According to experts, it's best to buy life insurance cover early in life since the premiums only get more expensive as you get older. But while this makes a strong case for joining the life insurance bandwagon in the 20's, there are few takers since this is the age when professional careers are just being forged and often there are education loans weighing on starting salaries.
On the other hand, people have not only settled into their careers by their 30's, and hence tend to be financially independent, but are also looking at increasing responsibilities. According to Aviva India, in the bargain, the possibility for unexpected costs also goes up, which can drastically impact your finances. This makes the need for saving and investing extremely crucial at this point. Little wonder then that thirtysomethings are the most targeted age group by insurance players.
How much should you invest?
Now that we have zeroed in on the ideal age for investing in a life insurance policy, the next big question is what is the ideal cover amount? Basically, your cover should be enough to substitute all net future income, netted for personal consumption and use.
One way to arrive at an ideal number is the income replacement method where you simply multiply your current annual income with the number of years left to retire. For instance, a 35-year-old with an annual income of Rs 15 lakh will require an insurance cover of Rs 3.75 crore (Rs 15 lakh x 25 years to retirement at 60). "Life cover should be 15-20 times your annual income before 40 and 10-15 times after that," according to Suresh Sadagopan, founder, Ladder7 Financial Advisories. This rule works best in nuclear families.
However, if you have obligations, such as loans, or specific financial goals or more dependants, your cover needs to go up correspondingly. In the above example, if the 35-year-old is planning to take a Rs 20 lakh car loan and wants to save another Rs 20 lakh for his daughter's education, this person must add another Rs 40 lakh to the protection need of Rs 3.75 crore. You will need to be extra careful if you are responsible for ailing parents or have a child with special needs.
According to Edelweiss Tokio Life, inflation is another vital factor. "With prices constantly increasing, make sure to account for inflation when you decide your life cover. A life cover of Rs. 10 lacs may appear big today, but at an inflation rate of 6%, your family would need a much bigger amount in the future," read a blog post by the company.
Last but not the least, one should review life cover at an interval of five years and add to it or reduce it depending on his/her life stage and financial obligations. Keep in mind that that most insurance companies offer additional optional riders along with term product. Experts say that it is better to enhance coverage by taking accidental death benefit, waiver of premium benefit and critical illness rider to make your policy more comprehensive.