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

How to Decide your asset allocation with Mutual Funds?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India) How to Decide your asset allocation ? The funds that base their equity allocation on market valuation have given stable returns in the past. Pick these if you are a buy-and-forget investor. Small investors are often victims of greed and fear. When markets are rising, greed makes the small investor increase his exposure to stocks. And when stocks crash to low levels, fear makes him redeem his investments. But there are a few funds that avoid this risk by continuously changing the asset mix of their portfolios. Their allocation to equity is not based on the fund manager's outlook for the market, but on its valuations. Our top pick is the Franklin Templeton Dynamic PE Ratio Fund, a fund of funds that divides its corpus between two schemes from the same fund house-the...

How to generate a UAN Online

Best SIP Funds Online   In order to make Employees' Provident Fund (EPF) accounts portable, the Employees' Provident Fund Organisation (EPFO) had launched the facility of Universal Account Number (UAN ) in 2014. Having a UAN is now mandatory if you have an EPF account and are contributing to it. So far, you got this number from your employer and every time you changed jobs, you had to furnish this number to the new employer.  However, in order to make it easier for you to get a UAN , and without your employer's intervention, the EPFO now allows you to go online and generate a UAN on your own. This facility can be used by freshers, or new employees, who are joining the workforce as well as by employees who have older EPF accounts but do not have a UAN as yet. As a new employee, you can simply generate a UAN and provide the number to your employer at the time of joining, when you need to fill up forms for your EPF contribution. As per a circula...

Mirae Asset Healthcare Fund

Best SIP Funds to Invest Online   Mirae Asset Global Investments (India) has launched Mirae Asset Healthcare Fund. The NFO of the fund will be open from June 11, 2018 to June 25, 2018. Mirae Asset Healthcare Fund is an open-ended equity scheme investing in healthcare and allied sectors. The scheme will invest in Indian equities and equity related securities of companies that are likely to benefit either directly or indirectly from healthcare and allied sectors. The investment strategy of this scheme aims to maintain a concentrated portfolio of 30-40 stocks. Healthcare is a broad secular theme that includes pharma, hospitals, diagnostics, insurance and other allied sectors. The fund will have the flexibility to invest across markets capitalization and style in selecting investment opportunities within this theme. Neelesh Surana and Vrijesh Kasera will manage this fund. In a press release, Swarup Mohanty, CEO, Mirae Asset Global Inves...

Reliance Regular Savings Fund - Debt Option

Reliance Regular Savings Fund - Invest Online     The scheme aims to generate optimal returns consistent with moderate levels of risk. It will invest atleast 65 per cent of its assets in debt instruments with maturity of more than 1 year and the rest in money market instruments (including cash or call money and reverse repo) and debentures with maturity of less than 1 year. The exposure in government securities will generally not exceed 50 percent of the assets. The fund uses a mix of relatively low portfolio duration with active investments in higher-yielding corporate bonds. It does not take aggressive duration calls but tries to improve returns by cherry-picking corporate bonds. This is reflected in the fund's returns matching the category and benchmark for five years - at 8.4 per cent - but lagging behind the category during a raging bull market in bonds in the last one year. The fund has been a consistent but not chart-topping performer in the income category. Despite its ...

Am you Required to E-file Tax Return?

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   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...
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