Summary of this article
Education loans can form the minimum basis for term insurance cover.
Future income and family responsibilities can raise insurance needs.
Students should factor in inflation when choosing long-term cover.
Taking an education loan does not necessarily mean the insurance cover should only match the loan amount. For families where parents are co-borrowers or guarantors, the loan could become a financial burden if the student passes away before repayment.
The total loan liability can also be higher than the amount already disbursed. Future disbursements and interest during the study or moratorium period can add to the amount that needs to be covered.
Education Loan Can Set The Minimum Cover
For a student with an education loan, the first step is to work out how much the family may have to repay if the student passes away before the loan is cleared.
Varun Agarwal, head of term insurance at Policybazaar, states, "The education loan should be the starting point for deciding the cover. At a minimum, the cover should be enough to ensure that the loan does not become a financial burden on the family, especially since parents are often co-borrowers or guarantors."
The calculation should also include amounts that have not yet been disbursed. "It is important to consider not just the loan already disbursed, but also future disbursements and interest that may build up during the study or moratorium period," Agarwal adds.
So, a student with a Rs 40 lakh education loan may need to consider a cover higher than Rs 40 lakh if further amounts are yet to be disbursed or interest adds to the liability. The exact amount will depend on the loan terms.
Future Responsibilities Can Raise The Cover
The education loan is only one part of the calculation. A student may have limited financial commitments while studying, but that can change after starting a career.
Supporting parents, getting married, having children or taking other loans can add to financial responsibilities.
"When deciding the overall cover amount, students should also consider the financial responsibilities they are likely to take on in the future - such as supporting a family, children, ageing parents and other major liabilities," Agarwal mentions.
Age can also matter when buying term insurance. A younger buyer may get a lower premium, which can then be locked in for the policy term.
Agarwal gives the example of a term plan bought at 18 costing around half as much as the same cover bought at 28. The actual premium, however, will depend on the individual and policy terms.
Future Income Can Help Decide The Cover
The loan amount and interest can help work out the immediate insurance need. Expected income, expenses and future responsibilities can then help determine the wider cover.
"Both factors matter, but they serve different purposes. The size of the education loan and the expected interest on it help determine the minimum cover needed today. Beyond that, the overall cover should take a longer-term view - typically based on the student's expected future income, expenses and financial responsibilities," Agarwal says.
For students looking at their future earnings, Agarwal suggests a cover of around 20 to 30 times expected annual income, subject to the maximum cover available from the insurer.
For example, if a student later earns Rs 6 lakh a year, this approach would put the cover at around Rs 1.2 crore to Rs 1.8 crore. At an annual income of Rs 10 lakh, the range would be Rs 2 crore to Rs 3 crore. These are illustrative calculations, not a guaranteed or universal cover amount.
For a student who is not earning yet, the cover cannot simply be calculated on an expected future salary. The amount available will depend on the insurer's eligibility and underwriting rules.
Inflation is another factor to consider for a policy that may run for many years. A cover that looks sufficient today may have lower purchasing power in the future as income, expenses and financial commitments rise.
