Skip to main content

How to do a Insurance Cover Calculation?

Take Into Account Current And Future Family Expenses, Inflation, Investments And Sum Assured Of Existing Policies

How much insurance is good enough is a question most people don't ask themselves. Many don't even realise that insurance is a security net, and not an investment vehicle. Most argue that they are paying tens of thousands as insurance premium and are reluctant to discuss additional insurance requirements.

Compounding this, people are not even aware that they require further insurance, over what they already have. Also, the most important benefit of having insurance, which is protection, is not fully appreciated.

WRONG ATTITUDE

Ironically, policy holders want to enjoy the benefits of insurance when they are alive (read investment), and opt for plans that give them some returns. That beats the entire purpose of an insurance policy, which is protection.

Insurance companies have, therefore, built in investment options. This also explains the popularity of unit-linked insurance products, which are essentially investment products, with lots of flexibility built in.

Tax savings is almost an article of faith for many of us. Since insurance comes under Section 80C, the premiums paid for insurance policies are eligible for deductions under this section. This has become one of the most important reasons for people buying insurance policies.

Going in for insurance primarily for tax savings is actually a sub-optimal way to go about tax savings. If one does not require insurance, the mortality charge being paid is actually money down the drain. Take the case of a 50-plus person, who may not have much insurance cover requirement. If he goes in for an insurance policy, the mortality charges he would pay for the cover would be a wasteful expense.

So, the first thing people need to appreciate is the requirement for adequate security cover. Then, they need to know how much cover they require. To find out this, we need to adopt the following method.

HOW TO ESTIMATE?

Take into account all monthly and annual expenses. About 90 per cent of that figure (it could actually be less) would be a fair estimate of expenses in the absence of the income earner. Subtract the insurance premium ( pertaining to the income earner) and personal expenses of the breadwinner.

Multiply the resulting figure by 23.

This figure is about 50 per cent more than the corpus that may be required and is an approximation to account for inflation.

Add to this the specific, goal-related expenses such as education, marriage, and so on. Subtract from this the current investments, assets that can be liquidated (like a second home, land, etc) and insurance cover on the income earner. The resulting figure is the amount of insurance to be taken, additionally.

Let's compute additional insurance requirement for Ramesh Jha using this method.

Jha and his family have a monthly and annual expense of 4lakh. Of this, 90 per cent is `3.6 lakh. The insurance premium pertaining to Jha is `40,000 a year and his personal expenses are about `20,000 ayear. After subtracting these two, the resultant figure is `3lakh. Multiplying this by 23 gives us `69 lakh, which would be the corpus requirement to take care of the expenses in future. But then, there are other expenses like education and marriage. These are estimated to be `20 lakh at today's cost. When that is added, the amount required comes to `89 lakh. From this, subtract current investments. These are `11 lakh in this case. The sum assured of the policies on Jha is `8lakh. Subtracting these two, the corpus requirement comes down to `70 lakh. He also has a second home, valued at `40 lakh. That could, potentially, be liquidated, if there were a need. Hence, the net exposed amount is only `30 lakh.

By this calculation, Jha would require an insurance of `30 lakh additionally to cover the risk-exposure to his family. This can very easily be taken care of at low cost, by going in for a term insurance. It would cost him under `10,000 each year. That is a pretty low cost to secure the family's future.

Insurance is protection. All other benefits are incidental. Its time people get this right.

Popular posts from this blog

Bear markets may kill, but bulls always return with vengeance

Average Gain Between Any Two Downturns Has Been 186% IF you have lost a fortune in shares by now, the best way to make it up perhaps could be by buying some more. Since the Great Depression of 1929, the world has undergone 12 major bear market phases. The average bear market has lasted about 22 months, and the market has fallen by an average of 51%. However, the average gain during the bull market between any two downturns has been an eye-popping 186%. The index here in question is the S&P 500. Bull markets — after every recessionary phase — have always been good for investors. All major bull rallies since end-1930 have resulted in markets gaining between 50-500%. Historic numbers show that the magnitude (size or breadth) of a bull market is much heavier than that of a bear market. The million dollar question is: Are we at the threshold of another bull market rally? Markets could go up intermittently, but convincing rallies will take time to happen. The current bear phase is...

Stick to Good Fund Manager who Can Multiply Your Investment

A manager may be the difference between the best and worst funds. Here's how you can find the right one    Does a mutual fund manager make a difference to your investment? The answer may not be as easy as you think, since most best-performing mutual funds have moved away from individualistic fund management to process-driven methods, limiting the scope of an individual's role in investment decisions. In fact, many fund managers would speak at length about how the "system" their fund house has in place makes their task of picking stocks easy even though it restricts their freedom. Still, the question is important, especially after recent reports that the Securities and Exchange Board of India ( Sebi ) may ask fund managers to disclose to investors their track record of managing money. Let us take a look at the universe of large-cap funds over the past five years. According to Value Research, an independent mutual fund tracking firm, the topper in the category is DSP...

NRIs and direct taxes code (DTC)

DTC Proposes To Do Away With Special Provision That Allows NRIs Liberalised Duration Of Stay In Country      THE new direct taxes code could bring a large number of global Indians under the tax net, as it does away with a provision that allowed individuals to escape tax in any country citing double tax avoidance.    The new legislation, introduced in Parliament on Monday, says an individual shall be a resident of India in any financial year if he is in the country for more than 59 days in that year, and has been has been India for more 365 days in four preceding financial years. A number of Indian industrialists including Vedanta's Anil Agarwal and Essar's Ravi Ruia have acquired non-resident status over the years.    The DTC has only attempted to clean up the provision in line with the laws globally. A phrase "being outside India" in the existing income tax law exempted individuals who stay outside the country for six months from paying taxes. This was prone ...

Tata Fixed Income Portfolio Fund dividend

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)       Tata Mutual Fund has announced dividend under the dividend option of Tata Fixed Income Portfolio Scheme B2 Plan A-DQ, Tata Fixed Income Portfolio Scheme B2 Reg-DQ and Tata Fixed Income Portfolio Scheme B2 Direct-DQ. The record date has been fixed as August 29, 2013. Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C. Invest Tax Saving Mutual Funds Onlin...

IDFC Classic Equity Fund

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   IDFC Classic Equity Fund IDFC Classic Equity is a large-cap equity fund which currently has assets under management worth Rs. 158.52 crore. It was launched in August 2005. The fund is benchmarked against the BSE-200 Index. Performance YTD 1-Year 3-Year 5-Year Since Inception IDFC Classic Equity 0.93 26.61 6.30 1.01 11.65 BSE 200 1.52 17.31 6.00 1.99 12.98 All figures in % as on January 31, 2013; Returns above one-year in CAGR terms ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now