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

Mutual Fund Exit Load Changes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...

Birla Sun Life Mutual Fund Launches Birla Sun Life NIFTY ETF

Birla Sun Life has launched a new fund namely, Birla Sun Life Nifty ETF, an open ended exchange traded fund. The new fund will be open for subscription from 4th July to 18th July 2011, at an offer price of Rs 10 per unit. The investment objective of the scheme is to generate returns that closely correspond to the total returns of securities as represented by S&P CNX Nifty, subject to tracking errors. No exit load will be charged under the scheme. The performance of the scheme will be benchmarked against S&P CNX Nifty and will be managed by Satyabrata Mohanty.   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   1) DSP BlackRock Mutual Funds: http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html   2) Reliance Mutual Funds: http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html   3) Birla Sunlife Mutual Funds: http://prajnacapital.blogspot.com/2011/...

Mutual Fund Reivew: Birla Sun Life Asset Allocation Conservative

Birla Sun Life Asset Allocation Conservative has numbers on its side to prove its credibility… Don't be surprised to find this Fund of Funds ( FoF ) in our recommendations. It has earned its place. And despite the difference in the structure of the product, there is no arguing with the numbers.   Of the total 6 years of its existence, the fund has been among the top 10 funds in its category in four of them. Last year it put up an average show and the only year it underperformed its peers was in 2008.   One aspect to look at when investing in an FoF is the expense ratio. The expense ratio of an FoF is capped at a lower limit of 0.75 per cent (2.50% for an actively managed fund). However, the FoF not only has its own expense (though lower) but even the expense ratio of the fund it is investing into. Fortunately, the fund manager takes that into account. "Expense is one of the important criteria used for fund selection and is the main reason for our investment in BSL Ind...

Short-Term Investment Options in Mutual Funds

Mutual funds offer liquid funds and ultra short term funds in the debt category, which are suitable for short investment periods. Ultra short-term funds were earlier known as liquid plus funds. Liquid funds invest in money market instruments with a maturity of 91 days or less. However, there are no such restrictions for ultra short-term funds. Who should invest in these? These are open-ended schemes. Investors with a short investment horizon or with surplus cash and low risk appetite should look at these. These could include corporate as well as retail investors. Those interested in staying invested for less than 15 days can opt for liquid funds. Retail investors who want to remain invested for two-four months, can look at ultra short-term funds. The short duration for both liquid and ultra short-term funds shields them from any interest rate volatility.   What kind of returns do they offer? In terms of an investment period less than 15 days, these funds are comparable to a ba...
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