Got a salary hike? Your term insurance cover may need a second look | Personal Finance

A salary hike can also increase your financial responsibilities, making it important to reassess whether your existing term insurance cover is still adequate. Financial planners say life cover should keep pace with changes in income, liabilities and long-term family goals rather than remain fixed for years.

 

Many policyholders continue with the same term insurance cover they bought several years ago without reviewing whether it reflects their current financial situation. However, a higher income often translates into a higher standard of living, larger financial commitments and greater dependence of family members on that income.

 

Why income growth changes insurance needs

The primary purpose of a term insurance policy is to provide financial support to dependants if the policyholder dies during the policy term. As income rises, the financial value that needs to be replaced for the family also increases.

 
 

For instance, someone earning Rs 8 lakh annually may have bought a cover that seemed sufficient at the time. Several years later, if the person’s income has doubled while they have also taken a home loan and started planning for children’s education, the earlier cover may no longer be enough.

 

Insurance planners generally recommend reviewing life cover whenever there is a significant change in financial circumstances rather than relying permanently on the common thumb rule of buying insurance worth 10-15 times annual income.

 

New responsibilities often follow a higher salary

A salary increase is frequently accompanied by additional financial commitments. These may include:

 

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  Buying a house and taking a home loan
• 
  Planning for children’s education
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  Supporting ageing parents
• 
  Higher household expenses due to lifestyle changes
• 
  Building larger long-term financial goals

 

Each of these factors increases the amount of money a family may require if the primary earning member is no longer around.

 

For example, an outstanding home loan would still need to be repaid, while children’s education and day-to-day living expenses would continue irrespective of the family’s loss of income.

 

Lifestyle inflation also matters

Financial experts often refer to “lifestyle inflation”, the tendency for spending to rise along with income.

 

A better salary may result in moving to a larger home, paying higher school fees, spending more on healthcare for parents, hiring domestic help or increasing savings for future goals. While these decisions improve quality of life, they also increase the family’s monthly financial requirement.

 

As these recurring expenses become part of the household budget, the amount of life insurance required to maintain the family’s financial stability may also increase.

 

How to estimate the right cover

One commonly used method is the income replacement approach. This estimates how much money the family would require to replace the policyholder’s future earnings for a certain number of years.

 

Several online term insurance calculators also help policyholders estimate their insurance requirement by considering factors such as:

 

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  Current annual income
• 
  Existing life insurance cover
• 
  Outstanding loans
• 
  Number of dependants
• 
  Existing investments and savings
• 
  Desired policy tenure

 

Such calculators do not provide a definitive answer but offer a useful starting point for assessing whether the existing cover remains sufficient.

 

Existing investments can reduce additional insurance needs

An increase in income is often accompanied by growth in investments such as mutual funds, provident fund balances or fixed deposits.

 

A sizable investment corpus may reduce the amount of additional insurance required because these assets could also support the family financially. However, financial planners generally advise evaluating investments, liabilities and insurance together instead of viewing them separately.

 

The objective is to identify whether there is any protection gap after accounting for both existing assets and future obligations.

 

A higher income may also make larger cover affordable

A salary hike does not only increase insurance needs; it may also improve affordability.

 

Some individuals postpone buying higher life cover because premiums strain their budget during the early stages of their career. As income rises, upgrading the sum assured or purchasing an additional policy may become financially easier.

 

Since term insurance premiums generally depend on factors such as age, health, lifestyle, policy term and the sum assured, reviewing insurance requirements sooner rather than later could also prove beneficial.

 

When should policyholders review their term plan?

According to news agency PTI, a review should be considered after major life events such as:

 

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  A significant salary hike or promotion
• 
  Marriage
• 
  Birth or adoption of a child
• 
  Taking a large home or education loan
• 
  A spouse leaving employment
• 
  Parents becoming financially dependent

Significant growth in investments