Ch. 5: How Much Whole Life Insurance Do I Need?

Figuring out the right cover, especially when it comes to Whole Life term insurance plans, is a tricky business.

Imagine you wish to invest, avail a loan, or want a source of cash after you retire for you and your spouse. Or you want to make sure you leave behind a legacy, a parting gift for your family to secure their finances and maintain their lifestyles in your absence.

Whole Life Policies help you with just that. And it is important to learn how to calculate the right coverage amount as well as the premium you’ll have to pay - to make sure both your present and future finances don’t face any disruption!

A whole life insurance cover is an amount chosen by you when purchasing the policy. You are covered for their entire life under a Whole Life plan.

It is available to be paid out to -

• You, i.e, the policyholder in case you survive till the end of the policy term (Maturity Benefit)
• Nominee/beneficiary of the policy in case the insured person dies within the policy term (Death Benefit)

You may also be entitled to a Survival Benefit at the end of the premium payment period. This usually is a percentage of the cover amount or the bonuses (if any). This differs from insurer to insurer.

For example -

Avinash, a 50-year-old male, opts for a whole life cover of Rs 1.5 crores in 2022. The premiums are to be paid for the next 15 years and he has appointed his wife, Rekha, as his nominee.

The policy has the following benefits -

• Maturity Benefit - Avinash will receive the lumpsum amount of Rs 1.5 crores plus accrued bonuses (if any) when the policy matures, i.e., when he crosses 99 years of age.
• Death Benefit - If he passes away before the maturity of the policy, Rekha will receive the entire cover amount of Rs 1.5 crores plus accrued bonuses (if any).
• Survival Benefit - The survival benefit is generally 5% of the cover amount, which in this case equals 7.5 lakhs. This amount will be paid to Avinash every year from 2037 onwards till the entire 1.5 crores gets exhausted.

You should keep the following things in mind while calculating the cover amount you wish to opt for -

• Your future plans or the needs of your nominee/family. This will help determine the cover amount you or your family needs, without having to restrict the style of living and dreams. It should be enough to take care of your family’s finances in your absence.
• Your current budget for premiums, because payouts are given only when premiums are paid on time.

Ensure you strike the right balance between these two aspects to get the possible cover amount.

Whole Life Insurance is primarily leaving behind a comfortable life for your family. It’s usually used as a way of leaving a mark behind, a legacy, to live in the memory of their loved ones.

Choose a cover amount that will encompass the financial needs of both you and your family, whether it’s paying off loans, wedding/higher education costs, or even daily expenses like school fees. While calculating the cover amount you’ll need, consider every aspect of your finances - so you don’t end up with a coverage that is lesser than your requirements.

Here’s a robust way to calculate what financial security your family needs.

Calculate your financial responsibilities. Find out the amount of money your family will need let’s say if you decide to move to an ashram today

• What are the expenses they will incur every month to live their current lifestyle?
• What are their long term financial goals - for instance your child’s higher education or probably marriage expenses etc. Calculate a 6-8% inflation for every year till this money would be required.
• What are the loans and liabilities you have?

Now subtract the kind of funds you require above with the amount of funds you already hold in the form of assets. Ensure you include only those assets that can be liquidated and not the ones which cannot. For instance, there is no point including gold ornaments or the house your family lives in when calculating your assets.

The net value calculated above of your financial responsibilities and assets is the gap in your family’s protection today. Now, subtract this with the amount of life cover you already hold.

For most of us, it would make sense and be more efficient to take a term life insurance cover to protect your family from financial goals and expenses that are expected to incur till a particular period of time.

Whole Life can then cover the balance after the term life cover, in addition to the corpus or legacy you want to leave for your family.

Every family has a unique set of requisites and it’s crucial to factor in every detail. And, make sure that you review your cover amount every few years, to ensure you account for any new, unplanned responsibilities you take up.

Calculate the amount you will need to secure the financial futures of your loved ones, in just two minutes, with our Human Life Value (HLV) Calculator.