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What is the right combination of Life Insurance and Riders for a young couple

Life Insurance

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Life Insurance article in Advisorkhoj - What is the right combination of Life Insurance and Riders for a young couple
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Youth is that period of our lives when we are free from almost all responsibilities. We graduate from college, land a good job and become financially free. The next step, which is also the most obvious one, is settling down. After marriage, we own a responsibility of providing for our family. Even if we don’t have kids, we have to provide for our wives. What if we have dependent parents? Wouldn’t we have to provide financial assistance to them too?

When you have dependents on you, it becomes imperative to have a financial support for them even when you are not around. How can you create such a support? The answer lies in Life Insurance.

Yes, a life insurance policy is the only financial instrument which protects against the financial loss caused by premature death by providing a lump sum benefit. This benefit provides the much needed financial support to the bereaved family who are dependent on the bread-winner for their lifestyle needs.

How does Life Insurance help?

Term insurance plans sold by life insurance companies are designed to protect the financial loss suffered in case of death of a bread-winner. The premiums required by the plan are very cheap and the level of coverage provided is huge. As such, individuals can easily afford to insure their lives for a considerable amount of Sum Assured at affordable premium rates.

Case Study

– Mr. and Mrs. Mehra, aged 32 years and 30 years respectively, are a young couple. Being recently married, they have no kids. Mr. Mehra is a software engineer while his wife is a housewife. Their basic income and expense structure looks like this:


Life Insurance - Case Study


The Mehras want to invest in a life insurance policy. They do not know which policy would be ideal for their requirements and what should be the cover amount. They are in a dilemma. Which policy would be best suited for their needs?

Solution

– The Mehras are a young couple. Since they do not have any kids till now, they do not have the financial burden of planning for their kids’ future. However, as Mr. Mehra’s wife depends on him financially, his immediate need should be a Term Insurance Plan. This is the only life insurance plan which would enable Mr. Mehra to opt for an optimal level of Sum Assured at premiums which are affordable for his pockets.

What is the optimal level of Sum Assured?

Here comes the tricky and yet the most important part of life insurance planning. A term plan is effective only if a sufficient level of coverage is taken. This optimal coverage level varies as per the needs and requirements of individuals. No two individuals have the same income and expense structure, financial goals and investment planning practice. Thus, there are commonly accepted calculations or methods which aim to calculate the ideal level of coverage which should be taken.

What are the methods?

Some popular methods to calculate the optimal level of coverage are as follows:

  • Human Life Value Method

  • Income Replacement Method

  • Annual income multiple Method, etc.

To understand the above-mentioned methods, let us work on the Mehra’s case study.

Human Life Value Method Computation assuming there is no inflation or change in average monthly expenses.


Life Insurance - Human Life Value Method Computation


Thus, Mr. Mehra should have a minimum insurance cover of at least Rs.77 lakhs. In case of his unfortunate death, the family could invest the benefit received in a risk-free investment and avail a return which would be sufficient to pay the monthly expenses and thus maintain the same lifestyle.

Income Replacement Method


Life Insurance - Income Replacement Method


Under this method, the income which Mr. Mehra is supposed to bring in till his retirement is appropriated. The cover is then determined based on the income which is supposed to be contributed by Mr. Mehra throughout his active life.

Annual Income Multiple Method

This is a very basic method which is also called the ‘Underwriter’s Thumb Rule’ method. The coverage is equated as a multiple of the annual income. The multiple is higher for young individuals and lower for older ones. In case of the Mehras who are a young couple, a 12 to 15 times the annual income are the ideal multiple values. So, their optimal coverage should be Rs.1.08 crores to Rs.1.35 crores

Rider additions

Riders are additional benefits which can be added to a base policy. Riders increase the scope of coverage provided under the plan. A very negligible amount of additional premium is payable for availing riders and riders can be added to any policy when it is being bought. Some common and beneficial riders are as follows:

  • Critical Illness Rider

  • Accidental Death Benefit Rider

  • Waiver of Premium Rider

  • Term Rider

Why do riders make sense?

  • Extended coverage

    – riders provide an additional benefit, which is usually equal to the Sum Assured of the plan, when the event which is covered by the rider occurs. For instance, a Critical illness Rider covers specified illnesses and when the insured is diagnosed with any of the covered illnesses, the rider benefit is paid. Similarly, the Accidental Death Benefit rider provides an additional Sum Assured in case of an accidental death.

  • Low premiums

    – opting for riders is also easy on your pockets. The additional premium required for taking riders is extremely low. It is only a tiny fraction of the basic premium.

Thus, riders enhance the coverage provided by your term insurance plan at very little premium outgoes.

Which riders are suitable for a young couple?

As in the case of the Mehras, who are a young couple, two riders make the most sense. One is the Critical Illness Rider and the other is the Accidental Death Benefit Rider.

Why?

Young couples, like the Mehras, are prone to two major risks. One is the health risk of developing a critical ailment while the other is that of facing an accidental death. In case of a critical illness, the expenses incurred on the treatment of the illness are huge. A critical illness rider helps in providing the necessary funds to meet such treatment expenses. They also cut down on the necessity of investing in a separate critical illness health plan.

Even in case of the Accidental Death Benefit Rider, the double Sum Assured received sure helps in tackling the financial emergency faced by the family on loss of the bread-winner.

How to achieve the right balance between a life insurance plan and the required riders?

Yes, we agree that a term insurance plan is the most essential financial instrument. An ideal level of Sum Assured should be taken when buying this plan. Along with a term plan, essential riders should also be included in the coverage. For young couples, an Accidental Death Rider and a Critical Illness Rider would be ideal. So, in case of the Mehras, here’s how they can attain the right combination of life insurance and riders:


Life Insurance - The right combination of life insurance and riders


If the Mehras plan carefully and choose the best plan which provides the said coverage at competitive rates, they can easily secure their future against financial contingencies which are caused due to premature death or any critical illness. This would be their ideal mix of life insurance since they do not have any responsibilities for their kids or planning their retirement. However, there are some points which should be borne in mind when opting for the ideal coverage option. These points are mentioned below:

  • The tenure of the term plan should be taken for the maximum possible period. This would ensure longer coverage duration. Nowadays, there are term insurance plans in the market which provide coverage till 80 years of age. These plans should be your ideal choice.

  • If a high level of Sum Assured cannot be afforded immediately, a young couple should at first avail the highest possible cover. Later on, the coverage should be reviewed periodically to review the Sum Assured. For instance, when a young couple has kids, the Sum Assured should be increased as expenses and the associated responsibilities increase.

  • There is a clause which states that the rider premium should not exceed 30% of the basic premium. As such, there is a limit on the rider coverage available. Despite the limits, riders should be attached to the policy for a better scope of protection.

Conclusion

Thus, as the Mehras were educated, if you too are a young couple, its time you know how to make an ideal insurance choice which combines both a term insurance plan and the necessary riders.

Insurance is the subject matter of the solicitation.

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Advisorkhoj Research Team

Our research team has a combined experience of nearly 40 years in the financial services management and distribution, across the entire spectrum of product classes including mutual funds, insurance, equity broking and loan products. To contact our research leads, please see their contact information below.

Dwaipayan Bose: dwaipayan@advisorkhoj.com
Pradip Chakrabarty: pradip@advisorkhoj.com

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