In few of the earlier posts I discussed about how should you decide your life insurance cover, why shouldn’t you mix insurance and investments and in what circumstances taking insurance doesn’t make much sense. While at one end of life insurance spectrum, there are people who are uninsured or severely under insured, at the other end of the spectrum there are people who are over-insured. Many of us probably do tend to go overboard with life insurance!
(Disclaimer – Like most of the things in personal finance, it is more personal than finance. It is up to you to decide what approach do you want to take towards life insurance. You may be uninsured, under insured, adequately insured or over insured – the choice is yours. The judgement is yours. I can at max, share my rationale and justifications – which may or may not suit your context!)
Do people go overboard with life insurance?
To begin with, one needs to understand what is the ideal amount of life insurance one should have?
While it is a subjective call, I would suggest to have a term insurance cover to the range of 10 – 25X of your annual expenses. This number can vary if you have lot of assets versus lot of liabilities or if you have working spouse versus non-working spouse. But you need to do your own math!
The number is not sacrosanct per se, but a suggestion. So there is probably nothing wrong in going for an insurance cover, which is say, 30X or 40X of your annual expenses.
However, lot of us tend to go overboard with life insurance. This can manifest itself in either taking (large) insurance cover from multiple providers or having large insurance cover from a single provider.
So, if your annual expenses are Rs. 10 Lac a year, do you need a insurance cover of Rs. 5 Crore? Or is something like Rs. 2 Crore insurance cover enough? Or will even Rs. 1 Crore insurance cover suffice?
Remember – While they payout in case of death can be huge in case of higher cover, you will also be paying a higher premium – every year.
I don’t have any right answers (or maybe, there are many right answers!). You may need it or you may not need it. Choice is yours. You are the best judge of your situation and your needs!