INFLATION-PROOFING: Children’s higher education plan | Photo Credit: Deepak Sethi

When you receive a salary hike or a performance-linked bonus, the first instinct is to celebrate — and rightly so. But once the excitement recedes, what you do next will have long-term financial implications. While many rush to upgrade their lifestyle, one crucial step is often overlooked — obtaining and strengthening life insurance coverage.

A PwC report analyses spending across three key categories — obligatory (39 per cent), discretionary (29 per cent) and necessity expenses (32 per cent), which are typically distributed across common consumer expenses. Despite the distributed spending, at least 90 per cent of consumers choose to allocate only a percentage of their monthly income to investment products. So, while your lifestyle and responsibilities grow, the financial shield remains unchanged, exposing your family to unnecessary risk.

Added risks

Greater earnings spur a tendency to take on bigger commitments, such as a larger home loan, school upgrades for children or higher living expenses.

The Reserve Bank of India’s annual report for 2023-24 shows rising household financial liabilities at 6.1 per cent of gross national disposable income (GNDI), while net financial savings hover at just 5.1 per cent. This widening gap between liabilities and savings reflects a growing fragility in personal finances, especially when life insurance is consistently ignored.

Alarmingly, a study found that 46 per cent of Indians depend on personal research for life insurance decisions. Since one size doesn’t fit all, they run the risk of overlooking major life events, including marriage, birth of a child or even the untimely demise of a family member, when reassessing coverage. Additionally, the study found self-employed and affluent individuals to be at a higher risk of under-insurance, with 43 per cent admitting they haven’t reassessed their coverage.

Insurance priorities

A portion of your bonus or raise may be redirected towards enhancing insurance coverage.

Term insurance: Consider this: A 30-year-old pays ₹10,000 a year for ₹1 crore in term insurance, subject to conditions. Delay till 40 and the premium increases to ₹20,000 a year. Buy insurance sooner to lock in a lower premium.

Children’s education and savings plans: Education inflation in March 2025 was 3.98 per cent. It often outpaces food and retail inflation. In effect, a degree that costs ₹5 lakh today could cost ₹35 lakh in 10 years. By the time your kids grow up, you will need more funds than you have today for their continued education.

Wealth-building plans: On average, products such as unit-linked investment plans (ULIPs) have been known to fetch a return of 10-12 per cent in equity-linked plans and 6-8 per cent in debt funds, over the last 20 years. The maturity amount of ULIPs is tax-free, making it suitable for medium-term investment.

Annuities for retirement planning: Annuities can channel your savings into a steady monthly income for your retirement years. Ideally, it is recommended to invest 40-50 per cent of retirement corpus to annuities.

Cost of delays

India is projected to see a 13 per cent rise in healthcare costs this year, outpacing the global average. Without health or life cover, these costs could burn a hole in your savings. A monthly expense of ₹70,000 today, covering essentials and lifestyle, could climb to over ₹4 lakh in 30 years due to inflation. With lifespans increasing to 80 and beyond, one may need to plan for 20-25 years post retirement. A limited pool of funds will not suffice. Plan well to avoid falling short.

Actionable steps

Consider investing 20-30 per cent of your enhanced salary or bonus in buying a new policy or reassessing your life insurance coverage, and top this with investment plans that balance growth with protection. Review your portfolio annually, especially after major milestones.

Ideally, your life insurance cover should be 10-12 times your annual salary to adequately protect your present and potential financial liabilities. If you’re earning, for instance, ₹10 lakh a year, you should ideally have a coverage of ₹1 crore.

(Kamlesh Rao is Chairperson, and Venky Iyer is Co-Chairperson, Insurance Awareness Committee — IAC-Life)

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Published on September 1, 2025