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Planning for the Future

March 10, 2023

Table of Content

1. The Importance of Having a Term Plan

2. Understanding the Ideal Sum Assured

3. Evaluating Your HLV and Sum Assured

Do you plan for the future? We all have plans that we constantly work towards fulfilling. You may want to purchase a home, buy your dream car, or send your children abroad. All your plans have one thing in common – they require prudent planning.

The Importance of Having a Term Plan

Most people prioritise their family’s financial needs when planning for the future. While getting your finances in order, you may wonder how your loved ones will manage without you. Although nothing can replace you, a term plan can provide financial safety and security. These policies offer life coverage for a limited period. The payout should help your loved ones replace your lost income and pay instalments towards your existing debt.

Understanding the Ideal Sum Assured

You may not know how to select the correct sum assured when purchasing a term plan. Opting for a very high sum assured could put unnecessary financial stress on you in the present since your premiums will increase. Conversely, choosing a low sum assured could jeopardise your family's financial future. One way to calculate your sum assured is by using your Human Life Value (HLV). It helps you understand the present value of your future income. There are different ways by which human life value is calculated. Two of the most commonly used methods are the income replacement method and the need-based method. In the income replacement method, whatever income the family needs for support is covered by insurance. In the need-based method, the amount required to cover needs and goals in case of death of the sole breadwinner is calculated.

For example, using the Income Replacement Method, HLV can be calculated in this way -

Say you’re 28 and you earn INR 60,000 each month or INR 7,20,000 per year. If you hope to retire at 55, you have another 27 years of work ahead. Based on this, we can calculate your HLV using the following formula:

HLV = Annual Income x Number of Working Years Left

Your HLV = 7,20,000 x 27 = INR 1,94,40,000.

Based on this calculation, a sum assured of INR 2 crores could provide your family with a good financial safety net to fall back on.

Evaluating Your HLV and Sum Assured

Your HLV depends on how much you earn at a current point. What happens when you get an increment? Your HLV goes up, but your sum assured will likely remain the same. Once you purchase a term plan, you will have limited chances to change your sum assured amount. Let’s look at when you should re-evaluate your plan and sum assured:

When You Tie the Knot

Marriage is the start of an exciting new adventure. Given that you now have more financial responsibilities and a person relying on you, you should evaluate your existing term plan. You could consider increasing your sum assured to help your spouse replace your lost income and maintain their standard of living.
When You Welcome a Child

Welcoming a new life into the world and your family means you are now responsible for another person. It’s also the best time to have another look at your term insurance plan. Now, you have to plan for your child’s education and future dreams. Increase your sum assured to secure your child’s hopes and dreams.
When You Opt for a Home Loan

If you’re taking a loan to buy your family’s new abode, you should increase your sum assured. The new amount should help your loved ones pay off any pending debt.
When You Get a Significant Increment

Your HLV depends on how much you earn right now. So, if you get a significant increase, you should increase your sum assured accordingly.

HDFC Life offers a free HLV calculator on its website, and term plans that allow you to increase your sum assured as required. While the HLV is a good place to start, you must also consider inflation and debts while calculating your term insurance coverage. After all, your family’s financial future could depend on the choices you make today.

Discover more about the link between marriage and term plans in HDFC Life’s new series – Missing Dulha!

ARN: ED/02/23/917

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