TAKE STOCK OF YOUR FAMILY’S LIFE INSURANCE
DON’T LEAVE IT TO THE YEAR-END FOR FINALISING INSURANCE PURCHASE. TAKE STOCK OF IT TODAY, AND EVALUATE IT USING THESE METHODS
Let’s take a little test. Which of the following three things have you done recently? One, purchased a life insurance policy right at the end of the financial year to save tax. Two, purchased it without calculating your family’s actual insurance needs. Three, surrendered or cancelled a policy that was held for five years or less.
If you’ve answered “yes” to any of these questions, we need to talk about how you can make better life insurancerelated choices. As you know, life insurance is a critical component of your financial portfolio. It will keep your family from financial stress in case you had an untimely death.
WHY MUST YOU INSURE?
Life insurance is often purchased for tax-saving purposes. While this is a valid reason, it should be secondary to protecting your family. A life cover helps in covering the longterm expenses that will be incurred by your family — rent, EMIs, healthcare, children’s education, etc, if you won’t be alive to pay it for yourself.
It isn’t easy to calculate how much money your family will need in case of your untimely demise. It involves guessing the future income needs and wants of the family, factoring in inflation, and adjusting for lifestyle upgrades. This is why care must be exercised in making these calculations as best as you can. This will help you in buying the right insurance product.
Life insurance plans are financial products for the long term. They are best purchased when you are young and healthy. If you keep surrendering or discarding your life covers every few years, it reveals the same lack of calculation. Buying new covers at an advanced age will cost you more money. But if you calculate your insurance requirements properly, it would help you retain your plan for the long-term, and you can buy additional coverage only where upgrades are needed.
SOME METHODS
Here are some methods to help you ascertain how much life insurance you need.
Income replacement method: This a basic method, but it should provide you an entry point to understanding how insurance needs can be calculated. Suppose your age is 30 today. Your annual income is `4 lakh. Your family’s income requirement is `3 lakh. You expect to retire at 60. Therefore, your insurance cover should be able to provide your income for 30 more years. So you need (300,000x30), or `90 lakh. However, this method is simplistic, and some depth is needed in the calculation.
Human life value method: This method calculates the present
Life insurance plans are for the long term. They are best purchased when you are young and healthy. You shouldn’t discard your policies quite often. value of your future income requirements. Let's say you are 30, will retire at 60, and have a current annual income is `4 lakh. You pay `5,000 as taxes and `1 lakh towards personal expenses. You are left with `2.95 lakh which is what you spend on your family. Let’s assume this income grows at eight per cent every year. The aggregate income requirement in 30 years, assuming an eight per cent annual increase over `2.95 lakh, is `1.45 crore.
Needs Method: This is a more holistic approach to calculating insurance needs. It takes into account such items as most recent living costs, balance of existing loans, healthcare needs, children's education fund, life and retirement income for the surviving spouse, and all other needs and regular wants that may need to be fulfilled. It also takes into account the value of existing incomes, investments, and insurance covers, and their collective values may be deducted from the future income needs.