How much insurance is good enough for you?

[dhilipkumar]

How much insurance is good enough for you?

While everyone may advise you today to 'get insured', few will actually tell you how to get adequately covered. Have you, however, ever wondered how much cover is actually good enough for you? For instance, you might have several insurance policies, but are you also adequately insured? You need to know this, not only as an individual but as a consumer too – particularly in view of the fact that the majority of Indians are still either uninsured or underinsured.

For, "while too little life cover could result in the family not being financially self-sufficient in the event of the unfortunate death of the policyholder and chief wage earner, too much insurance would mean higher outgo of premiums at the cost of other necessary lifestage and lifestyle spends," says Shyamal Saxena, chief distribution and marketing officer, Bharti AXA Life Insurance Company.

But getting adequately covered is also not easy as "there is no one single formula for deciding the amount of life insurance one needs," says a senior executive of Tata AIG Life Insurance.

There are, however, certain thumb rules which could be used to determine the life insurance needs. A very rudimentary method is 10-12 times your annual earnings.

"This is a thumb rule used to calculate the amount of insurance required by an individual. The sum insured basically should be equal to an amount which, if invested, should fetch a regular income for the dependants of the insured so that they are able to maintain a lifestyle which they are used to. In case there are any liabilities, such amounts should be added to the amount of insurance required," informs Rajesh Relan, MD, MetLife India Insurance. The optional approach to ascertain life insurance need is the financial need analysis approach. This is an approach which can take care of specific needs of an individual. Here the basic objective is that the insurance coverage should be sufficient to provide for the dependents' needs in case the breadwinner should die early.

"The needs should include the client's financial liabilities such as home loans, car loans etc and the funds required to support the dependants for the desired period. It may also include money required for specific family needs such as son's/daughter's education or marriage," says the Tata AIG Life executive.

For example, if Mr A has a housing loan of Rs 5 lakh, a car loan of Rs 4 lakh and his family requires Rs 15,000 per month if he is no more, the life insurance cover should be equal to the amount which will earn Rs 15,000 per month for the family and liquidate his outstanding home loan and car loan.

According to another view, while choosing a cover for a person with dependants, the sequencing should be 'risk cover' first and then 'savings'. "The amount of cover is a factor of income and consequently the paying capacity, the nature of job, expected earning period, and amount of liabilities (personal loans, housing loans etc) reduced by any estate already existing (savings & investments)," says a top executive of Birla Sun Life Insurance.

[dhilipkumar]

How much insurance is good enough for you?

To begin with, he says, an assessment of one's own financial needs taking into account the life stage, risk profile, dependants, disposable income and liabilities has to be undertaken. This will help identify the protection and savings needs for the person. The protection should provide for all the liabilities and future earning potential of the person insured. This will at a minimum ensure that the lifestyle of the dependants is not significantly altered if anything unfortunate were to happen to the person. The savings portion will be determined by the financial goals of the individual.

Thus, the amount required to maintain the standard of living will be based on a comfortable projected monthly expenses indexed for inflation. A person would require at least this amount towards monthly expenses. The actual requirement would be closer to 120% of the amount to account for inflation and increasing it for health related expenses.

For example, let us consider a male aged 30 years with current expenses of Rs 20,000 pm will retire at 60 years. Taking into consideration an average inflation rate of 5% pa, his projected expenses at retirement will be Rs 87,000 pm. However, average expenses per month during retirement @ 120% will be Rs 1,04,000. Thus, the amount required at retirement will be Rs 1.90 crore (assuming no inflation and that the person survives for 15 years after retirement).

"Needless to say, the key to any financial planning is to start early as the contributions required are lower and the power of compounding ensures large savings," advises the Birla Sun Life executive.

Another method used is the Human Life Value (HLV) method. According to this method, the amount of insurance one should buy is directly dependent on his/her economic value, otherwise known as the 'Human Life Value'. This varies from person to person. Human Life Value' is the capitalized value of the net earning of an individual for the rest of his working span.

Under this approach, the effort is to estimate the future earnings of an individual and capitalize them with an appropriate discounting factor (a reasonable rate of interest) keeping in view the present inflation and bank rate. "This present value of the total future earnings is thus the total economic surplus available to the dependent family (as an economic unit). The surplus amount, however, does not include the individual's self maintenance charges, statutory or legal taxes, and also the existing life insurance premium," informs Ashish Kapur, CEO, Invest Shoppe India Ltd.

[vivek agarwal]

As far as Determining your premium amount is concerned, I found the Gain Calculator facility on the website ( http://buyigain.com ) of Bajaj Allianz iGain (Bajaj Allianz's Online ULIP) very handy. You can decide your annual Premium and the Gain Calculator shows the amount you can gain over the period of 1 year to 20 years.

[ganeshbala]

Hi vivek

thanks for the information

[vivek agarwal]

My pleaseure ganeshbala

[dwarakesh]

Now in most of the insurance company site , we can see the calculator facility for calculating the premium amount  and for the eligibility.

[Sudhakar]

Now in most of the insurance company site , we can see the calculator facility for calculating the premium amount  and for the eligibility.

Great you are an internet geek it seems.

But insurance is right for which age.