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When Aegon Religare Life Insurance began operations in India in 2008, its marketing campaign focused on the problem of underinsurance in India. In the past seven years, pure protection term plans have become more popular but a large number of Indians are still afflicted by KILB (Kum Insurance Lene ki Bimaari). A recent study by global reinsurer Swiss Re estimates that for every $100 (approximately Rs 6,500) needed for protection, the average Indian household spends only $7.8 (Rs 507), leaving a massive protection gap.

This gap is largely because Indians prefer to invest in endowment insurance plans or Ulips instead of buying pure protection term plans that have no maturity value. Only 14% of the 4,488 respondents to a recent survey by Ficci and Canara HSBC OBC Life Insurance had bought term insurance. An overwhelming majority (64%) had taken traditional plans and 19% had invested in Ulips.

If you have bought an insurance-cum-investment plan, chances are that the protection element is not big enough to meet this basic objective of buying life insurance. Traditional plans fall between the two stools of good returns and adequate life cover—they offer poor returns and very low life cover.

Rahul Barman, 30 yrs, Faridabad

Meet Rahul Barman, a telecom professional who pays almost Rs 1 lakh a year for three traditional plans that combinedly cover him for Rs 10 lakh. That's quite inadequate for a person who earns Rs 6.4 lakh a year, is the primary breadwinner of the household and plans to start a family next year.

Dependents: Wife (26) and elderly mother

Annual income: Rs 6.24 lakh

Monthly expenses: Rs 32,000

Outstanding loans: Nil

Recommended insurance cover: Rs 80 lakh

Existing life cover: Rs 10 lakh

Additional cover required: Rs 70 lakh

Cost of additional insurance: Rs 650 per month

Important tip: Though the required insurance is low right now, it will go up when the couple start a family sometime next year.

How much cover you need

An adequate life cover ensures that the family goals are not hampered due to the breadwinner's death. "Insurance should be taken to ensure goals are met on the target date, and the family does not have to bear financial loss, in addition to emotional loss, in the case of resources planned for a particular goal being insufficient to meet the goal expenses," says financial planner Dilshad Billimoria.

So, an individual must have an insurance cover that can help replace his income if something untoward happens to him. The life insurance cover should be big enough to generate income that can take care of the expenses of the family till his dependents are self-sufficient.

Web aggregators help you compute the ideal life cover taking into account your income, dependents and liabilities. However, you need to go beyond these calculators to ascertain the right sum assured. One broad approximation is about 6-7 times the annual income of the individual.

But this does not always reflect a person's insurance need. If he earns Rs 12 lakh a year (Rs 1 lakh per month) but has taken a home loan of Rs 50 lakh, he needs more cover than the Rs 72-84 lakh suggested by this approach. Pune-based Nagesh Pathak has an outstanding home loan of Rs 51 lakh. His life insurance cover must be big enough to settle this debt. On the other hand, if an individual also has other assets and investments, his insurance needs would be far lower.

"A simple rule of thumb would be 15 times gross annual income for those below 40 and 10 times for those above 40. To play safe they can add approximate current value of all goals to this figure," says financial planner Suresh Sadagopan.

Other more sophisticated means of arriving at the ideal figure include human life value (HLV), need analysis and income replacement methods, amongst which the former is the most commonly used one.

Nagesh Pathak, 36 years, Pune

Dependents: Wife (33) and Daughter (6)

Annual income: Rs 10 lakh

Monthly expenses: Rs 24,000

Outstanding loans: Rs 51 lakh

Recommended insurance cover: Rs 1.5 crore

Existing life cover: Rs 5 lakh

Additional cover required: Rs 1.45 crore

Cost of additional insurance: Rs 1,350 per month

Important tip: At Pathak's age, the premium will not be too high. If he delays the decision by 3-4 years, the premium will shoot up after he crosses 40.

How to work out human life value

The required insurance is equal to the present value of all future incomes that the life assured is likely to earn minus the amount of expenses, tax liability and existing insurance cover. For example, let's assume a 45-year-old sole breadwinner earns Rs 5 lakh a year. His personal expenses, including taxes paid, amount to close to Rs 1.25 lakh and he is currently paying an insurance premium of Rs 20,000.

"His family is thus left with Rs 3.57 lakh, which is the amount they would need to maintain their current lifestyle," says Billimoria. Assuming inflation of 8%, the human life value will be Rs 30.56 lakh, which is the minimum cover he needs to buy.

Apart from this, the insurance should also provide for crucial financial goals, such as a child's higher education and marriage. These are one-time expenses and their present cost should be taken into account while calculating the cover. The table on the left shows you how to calculate your insurance needs.

What online term plans offer

While a large number of Indians continues to invest in insurance-cum-investment plans with an eye on tax benefits, the advent of online term plans has slightly tilted the scales in favour of protection plans. These online policies are 20-30% cheaper than their offline counterparts.

Many insurers are now selling term plans only through the online channel. You can buy these covers directly from their websites or through aggregator portals.

The premium of these policies is so low because there is no intermediary and because the online buyer is perceived as a lowrisk customer. He is educated, earns reasonably well, is concerned about protection and is likely to have health insurance as well. In case of a medical emergency, he may be able to quickly reach a hospital and access specialised medical treatment. These factors combine to lower the risk for the insurer.

Some companies such as HDFC Life also offer the monthly premium facility so it becomes easier for the buyer. A 30-year-old man will have to pay only Rs 900 a month for a cover of Rs 1 crore for 30 years. At 35, the premium is slightly higher at Rs 1,070 per month.

However, go for the monthly premium option only if you are disciplined about your finances. When you purchase online, there won't be any agent running after you for the renewal premium. If you are the forgetful sorts and don't pay when the premium is due, your policy can lapse. Once this happens, you will have to buy afresh at a much higher premium. Companies offer a grace period of 15-30 days for late payment of premium but don't bank on it. Missing a monthly premium could result in the policy lapsing and you losing the insurance cover.

Agents try to dissuade online buyers, saying such policies don't get good service from companies. This is not true. The online customer can expect the same quality of service from the insurance company as any other customer. When a claim is processed, there is no differentiation between a policy bought online and one purchased through an agent. Besides, all insurance companies have to comply with the rules laid down by the insurance regulator Irdai.

Term plans are no longer the plain vanilla products they used to be till a few years ago. Insurance companies have crafted innovations that suit various customers and situations. In some plans, the insured amount goes up to account for inflation.

Choosing the right term plan

In others, the payout is not given as a lump sum but staggered over 10-15 years. There are also plans where you get back the entire premium paid at the end of the term. However, not all of these innovations are good for the customer. A plain vanilla term plan that pays a lump sum amount on death is perhaps the best way to insure yourself.