Why we buy 1 Crore Term Life Insurance ?

I receive many questions about buying the term insurance and how to choose them. However, the interesting thing what I noticed is, all targeting 1 Crore Term Life Insurance. What is the rationale behind opting this default amount?

Why this magic figure of Rs.1 Crore? Let us try to understand the rationale behind this mental blocking. There are many reasons to it. I tried to list them as below.

# Unable to calculate the requirement

The biggest difficulty for many of us is how to calculate the life insurance required amount. There are many procedures. However, I will try to explain the simple way.

We claim that ideal insurance coverage should be around 15-20 times of your yearly income. This assumption arrived thinking that for next 15-20 years, your family dependents may not suffer any financial burden. A simple and plain way of calculating your insurance.

The second and simplest form of calculation is as below. The sum of all below.

  • Your household expenses from today to till your retirement age (inflated expenses). Let us say your current household expenses is Rs.20,000 per month. Your age is 40 Yrs and your retirement age is 60 years. So you need to allocate Rs.20,000 (inflated expenses) for the rest 20 years TODAY.
  • Sum up all your existing loans.
  • Create contingency amount for your dependents. This acts like cushion apart from regular expenses.

From above three amounts, you exclude the existing insurance coverage and the financial assets you are currently having (like FDs, Mutual Fund Investment, Stocks, or any other financial assets). However, never include the house or any other asset which is usable to your dependents (like house, gold jewellery and all).

There are many ways to calculate other than these two like “Human Live Value Calculation Method” or “Need-based Analysis“. But here my point is to explain the misconception about arriving at life insurance need.

# The default option of 1 Crore Term Life Insurance by Insurance companies

You noticed it or not. But many life insurance companies set Rs.1 Cr sum assured as their default option of buying. I checked with few like ICICI or HDFC. The default is Rs.1 Cr. Something like below of HDFC Term Plan.

1 Crore Term Life Insurance

Such default options by insurance companies sometimes makes to decide to buy Rs.1 Crore Term Life Insurance. I will not say this may happen with many. But the probability is HIGH.

# Today we think Rs. 1 Crore Term Life Insurance is BIG

Normally we feel Rs.1 Cr is the big amount. How? By comparing current lifestyle. Remember the days of LIC policies around 20-30 years back. Sum assured used to be Rs.10,000 or Rs.50,000 for traditional plans. Now the premium rate of LIC’s term insurance is more than the sum assured of 20-30 years back.

It is all because of inflation, which we forget it. Rs.1 Cr after 20 years is equal to around Rs.25 lakh in today term (considering inflation of 7%). So think, for how long your dependents live with this Rs.25 lakh. May be 3-4 years??

Remember buying Rs. 1 Crore Term Life Insurance is not one time process. You have to review your insurance requirement once in a 5 year at least. If necessity, then you have to buy.

# Psychology of rounding off

Let us say our requirement is Rs.1.25 Cr. But mentally without any reason we round it off to the nearest number called Rs.1 Crore. The same applies when our requirement is Rs.80 lakh to Rs.90 lakh. Rounding off is the unnoticed no reasonal habit built in us.

This trend is exactly reverse to when we buy other things. We feel cost of Rs.99 is cheaper than Rs.101. This trend we usually see in products, which we consume.

# Feeling of Crorepati

20-30 years back Lakhpati was trend or we used to feel proud. But now the trend is towards Crorepati. So we feel having Rs.1 Cr policy means CROREPATI. It is just a feeling in mind that if I die today then my wife or family will be crorepati.

But as I pointed above, try to understand the inflation and other aspect of financial burder your family have to face.

Conclusion-Buying Rs.1 Crore Term Life Insurance is not wrong. What I am pointing is all are running behind this magic figure. That surprised me and thought to ward on this trend. Understand your requirement. Then go ahead.

Also, never ever be in illusion that life insurance buying is not a onetime process. You have to evaluate the requirement at least once in 5 years. If you need further insurance, you must go on adding till your retirement.

Hence, buying a single Rs. 1 Crore Term Life Insurance is not solution. But understanding the actual requirement is more important.

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51 Comments

  1. Dear Basavraj
    Thank you for very good article and explaining in a simple way. However I want to know if I have sufficient assets to meet up my family’s future expenses in my absence (MF, EQUITY and Real Estate excluding dwelling House) still I need term insurance or not? According to your formulas I should have 1.8 cr insurance which I have as assets. Regards.

    Reply
    • Dear Jharna,
      If you feel there are sufficient assets to care in your absence, then you no need to buy life insurance.

      Reply
  2. Hello Sir,

    My salary 45000/ per month
    i want 1 crore term insurance
    i able to 1 crore term insurance at this salary. & if not able so how much need income for 1 crore term insurance

    Reply
    • Banti-Your eligibility for Rs.1Cr Term insurance depends on insurance company’s decision. Hence, better you cross check with them.

      Reply
  3. dear sir,

    do i need to disclose individual policy only or group policy also while taking term insurance.

    i have disclosed individual policy but not group policy like home loan protection policy, PM JanDhan policy, company insurance, PF linked insurance etc in my proposal form for LIC e term .

    thanks
    Bhaskar

    Reply
      • dear sir,

        i have HDFC LIFE Group Credit Protect Plus Insurance Plan to protect HDFC home loan.
        and i have not disclosed this in existing policy details in proposal form.

        am i on correct path ?

        thanks
        Bhaskar rai

        Reply
        • Bhaskar-This I think you have to disclose as it is an individual policy.

          Reply
          • dear sir

            this is group insurance from HDFC life and available to home loan borrower only.
            but i have paid premium to get its membership and got membership document also.

            please clarify it

            thanks
            Bhaskar

            Reply
  4. Hi Basavraj

    My age is 29 years and annual income is 300000/- PA. Will you please tell how much coverage I will get in Term insurance for term of 30 years and also tell me which company will be good to go for a term insurance.

    Thanks
    Karan

    Reply
    • Karan-It is purely depends on insurance company. However, I may say around Rs.50 lakh coverage may be possible.

      Reply
  5. Hi, I am planning to buy a Term Insurance for 80 lakhs by Nov of this year. There might be a possibility that I will be shifting to States by Apr of next year as my wife has a H1B visa. In such a scenario what will happen to my Term Insurance Policy. Will it cease to exist? Will the amount of Premium go up? Do I need to inform the Insurance company about my move?

    Reply
    • KVP-Nothing going to change. But you have to inform to insurance company about your change in status.

      Reply
  6. Dear Basu,
    Should I go for two or three term plans of different companies by dividing amount instead taking term plan of single company with higher amount. I am thinking this beacause if one company reject other can settle. Please suggest.

    Reply
    • Mukesh-There is no logic in splitting. Hence, go with one insurer.

      Reply
  7. Sir,

    How does the term insurance work for NRI’s. ?

    Any information would be really helpful.

    Thank you

    Reply
    • BG-It works in same way. But only few insurance companies offer to NRIs.

      Reply
  8. hi bsavaraj.Ian 32 years old.my qualification is 10+2.am I eligible to buy 1crore e term insurance policy.I have my ITR

    Reply
    • Srinivas-For buying term insurance, your education qualification does not matter, but your income.

      Reply
      • thank u .but I saw d video on youtube filling e term insurance for 1crore.policy holder should be a graduate.could u explain

        Reply
        • Srinivas-There is no such guidance. In fact, I am undergraduate but holding term insurance.

          Reply
          • dear sir,
            if I had declared in proposal form as a graduate, what effect at the time of claim my family will face

            Reply
            • Dear Niraj,
              MAY OR MAY NOT BE. But your education will not form the MATERIAL FACTS related to Life Insurance. Hence, I don’t think it will affect the claim.

              Reply
  9. already have 3 Policy term insurance

    1.ICICI I PROTECT – 40 Lakhs on 2011
    2.EXIDE life my term plan – 25 lakhs – 2013
    3.Birla sun life term plan – 56 lakhs – 2014

    Total premium 40000 p/a

    My current age 37 i am overweight 120k

    today Fresh policy 1 Crore apply old policy close

    premium cheap 15k

    After Go to medical test my health condition any problem CLAIM rejected ?

    which company best term insurance

    Reply
    • Feroz-First get the new policy, then go for cancellation of existing one.

      Reply
      • which company better

        Reply
  10. Hi Basavaraj,

    I have 2 LIC policy(Money back and Endowment) .Its been 6 years me serving these policies by paying annual premium of approx Rs 44,000, term is 20 yrs for both, SA is 4lakhs and 5lakhs.

    But after understanding the actual meaning of insurance , now i am planning to surrender the present 2 LIC policy and take a term insurance policy which would come to around 6500-7500 as premium for 50lakhs SA. Do you think is this the right idea to stop my present LIC policy ?

    How would i calculate my surrender value ? I have checked in few websites though, if i surrender, i may lose Rs40000-50,000 amount per policy (whopping Rs 80000 to 1 lakh). What do you have to say about this ? Your help/advice in this regards would be highly appreciable .

    Thanks in advance 🙂

    Reply
    • Manoj-It is BEST idea of choosing term insurance over endowment. NO need to calculate surrender, you visit nearest LIC branch. They inform you the exact amount.

      Reply
      • Yes Basavaraj…very true 🙂 …..but my concern is i will b loosing around 80K if i surrender both….do u think its still good decision to close these policies and start a fresh term insurance ?

        Reply
  11. Sir,
    Personal Accident insurance or term insurance or any… which documents required for claim? All self attested documents valid for claim or original?
    If we have more than 5 policies from different insurance companies than it is not possible to provide original documents for claim after death. Such case what happens?

    Reply
  12. How many personal accident policies buy by single person ( individual person) ?

    Reply
  13. Hello Sir

    Thanks for you Article – most of Agents and advicsors does not talk about TERM Insurance ( i dont know its commission rate )- they are always busy and suggest about only children plan ( informing that it only help to their future, and also in children plan any thing happen to insured person ie parents – they no need to pay any premium after that like that many other benefits …….. ) please suggest me what are all insurance policy types are there and it compulsory need for every middle class family for their secure living.

    And i had three policies as below – about my family ( me 39, spouse 30, and girl aged 4 years ).Salaried person with Rs. 400,000 per annum , with own house. at now no big debts to repay.

    1. LIC Endowment policy for Rs.50,000/- policy date 2000 maturity date 2020 )
    2.Star Health medi claim ( joint policy for whole family ) policy for Rs.3,00,000/-.
    3. Aviva Term policy – Aviva Life Shield Advantage 31.03.2013 to 31.03.2042. 30 years or upto 65 years – for Rs.10,00,000/-

    By after reading your article and question and answers ……. and recent online term policy and offers and advertisements – now i feel i wrongly select my term plan at yearly premium of Rs.5835/- ( 3 year premium paid ) for Rs. 10.00 lakhs. ( can i continue in Aviva term plan )

    Advice me whether in future….. i need to invest in any other insurance policy.

    Thanks
    sundar

    Reply
    • Sundar-After learning all these things, do you still feel to go for insurance policy for INVESTMENT?

      Reply
      • Dear Basu

        Now no plan….. i interest to know whether my investment in Aviva Life Shield Advantage – had any benefit or waste of time and money?

        Advice

        Thanks
        sundar

        Reply
  14. Dear Basu,
    Very nice Article. I highly appreciate it.
    Earlier LIC was the only alternative and Typical Agents used to recommend Endowment Policy where highest commission was paid and parting of commission (2 – 3 monthly installments) was easily possible for them.
    Term Insurance was also available with LIC but was never discussed by Agents.
    Now all the private companies are selling online insurance policies without agent.
    Overall awareness about insurance is enhanced and people are not considering this as an investment now.
    I feel companies and everyone of us should always consider Insurable Interest concept and calculate the actual requirement of Insurance coverage.

    Best regards,
    Rajendra Kale

    Reply
    • Rajendra-I appreciate your views. The main culprit of not spreading the REAL INSRURANCE knwoledge is LIC and it’s agents force. Now they forced to do that because of existance of private players. Let us hope for the best.

      Reply
  15. Very nice article. Everyone should evaluate the required life cover using the methods you have suggested. It can be 50Lakhs or 5 Crores rather than going after a 1Cr magic figure.

    Reply
  16. Dear Basu,

    Very good article

    Reply
  17. Hey Basu,
    Nice article, regarding reviewing of policy 5 years back i bought ICICI prudential online term plan with SA of 50 lac, now i want to increase SA so in that case in same policy company can increase SA (after doing medicals if required) or i have to buy new policy with new SA or new policy with lets say 70 lacs SA (so old policy 50+new 70)

    Reply
    • Sumedh-If you are comfortable with existing insurer, then why you plan to go for new?

      Reply
      • Basu- as i want to increase in SA so can existing policy SA increased.

        Reply
        • Sumedh-You are not allowed to increase the existing policy. But you have to buy the new one.

          Reply
  18. Hi,

    thanks for the article. today we have many players in insurance. I recently came across the company “Edelweiss Tokio Life Insurance Plans”. how to know its performance and settlement details.
    since it is joint venture with Indian company and japan company how to know if my investement or term insurance is taken care in future. I mean today I take a 1 cr term plan for 30 years and later after 15 years this compnay may go to lossess then who will take care of my insurance plan then. because after 15 years if this company goes down, if i want to take same plan of 1cr will be costly for me at that age.

    Please clarify.

    thanks,
    satya

    Reply

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