Estimate your Life Insurance need

Team CrawFin/ Harshal Jawale, CFP^CM

Every one of us owns a life insurance policy, thanks to LIC for marketing and government of India for providing tax benefits. Yes our usual idea of purchasing Insurance policy is someone of our relative is LIC agent and we find it difficult to say no to him/her plus tax benefit carrot shown to us is difficult to resist. Although the intent from LIC may attract healthy debate it has done excellent job in creating awareness about Life Insurance need of an individual.

In this article we will focus on how much insurance amount is really required for an individual. Following are some thumb rules followed by us financial planners to estimate life insurance of a person, fine tuning depending on each person’s need needs to be done before reaching to final amount.

• Income Rule –

             Objective of this rule is to provide income support to your family for number of years.  

                   Below Age 35 = 12-15 times of your annual income

                   Age 35-50 = 10-12 times of annual income

                  Above age 50 = 8-10 times of annual income

• Premium as % of Income –

           Objective of this rule is to keep a check on your premium cost, if you are paying lesser premium it is more likely that you are underinsured as against your income levels.

                5% should be premium amount of annual income to replace your income

                1% premium of annual income plus for each dependant

• Human Life Value (HLV) –

                 Find Current Income

                 Deduct Current personal expenses

                 Find earning life remaining

                 Find its present value

This method calculates your actual amount needed. It calculates your potential earning till retirement minus your own expenses equal to amount that you are likely to earn for your family on net basis. Buying insurance meaning you are replacing the loss of that income.

• Need based –

               Calculate immediate cash needs like medical costs, any loans etc

               Net income needs like ongoing family expenses

               Special needs like child’s education, marriage, spouse retirement needs etc.

Addition of all above is your need to amount to earn in future, buying insurance will ensure that you fulfill all financial obligation even after death.

** Please note in method 3 & 4 it is very difficult to estimate future needs so it is best left to financial planners to calculate for you since they will also consider the corpus that is already generated by you till date, else simple methods 1&2 are enough to reach approximate insurance need.

I come across many individuals who claim that they have been cheated by agent by misspelling of product. I believe the bigger onus lies on investors shoulder to understand that when you are paying premium of INR 20,000 for 20 years term for sum assured of less than 5Lakh/pa then you are not buying insurance.

For a person of age 30, term 20 years, Sum assured of 40lakh the annual premium is only INR 6200 (tax benefit extra). Other riders for Sum assured 10lakh the annual premium amount is

Critical Illness rider = INR 1500

Accidental death benefit = INR 500

Permanent Disability Benefit = INR 400

Make sure you have some/ Pref. all riders with your policy. LIC doesn’t offer these riders with pure insurance policy.

Do you know – HDFC Ltd offers platinum fixed deposits at 10% pa. Read more on http://crawfin.blogspot.com/2011/10/hdfc-platinum-deposits-10-pa.html .

Wealthy investments need Healthy methods!!!