How to calculate your insurance needs Sunil Sharma The Tribune (Apr 28) The amount of insurance that one needs depend upon various factors which include age, the ages of spouse and children, income, mortgage and other debts, college/school expenses for children and/or spouse, and the size of the last bill youll ever incur. Rule of thumb In order to determine how much insurance one needs is to consider some or all of the following factors: Age of the insured: Premium rates generally increase with the age. If youre young, term life (covering a certain number of years) is the cost-effective way to cover your risk and keep your future life insurance options open. Age of spouse and children: This will help you estimate how many years of income replacement theyll need if you were to die. Mortgage and other debts: It is important to consider your home mortgage, car loans, education loans and other debts while planning for the life insurance. College/school expenses: One needs to factor in future education expenses for the children, and perhaps your spouse. It is important to consider that the school and college fee keeps going up faster than the general inflation. Other obligations: Any additional obligations towards meeting the needs of your siblings or parents. Current level of your income: If youve retired your debt and laid aside college funds, you may not need to replace your full income. It is recommended to replace at least 50% of the income as a starting point. However, higher the better. The main objective of life insurance is to provide financial support to your family when you are no longer able to do so. Unfortunately, humans do not have a fixed expiry date; it becomes difficult to predict your family’s future financial needs and many years from now. There are three most common approached used globally to determine the amount of insurance one needs: a) Multiples of income: This industry standard recommends that the death benefit, or payout amount, of your life insurance policy should be about 7 to 10 times your annual income. So if somebody is making Rs 10 lakh a year, somewhere between Rs 70 lakh and Rs 100 lakh would be the life insurance amount to keep a family in reasonably good shape if this person dies. InsureGuru b) Shortfall calculation: Use following steps: Step 1: Find the annual income you would want to leave your spouse and family for X number of years Step 2: Determine the other sources of annual income that will be available to them in future, such as your NPS retirement accounts, PF, gratuity, pension, savings, and your spouses salary Step 3: The difference between the numbers in step 1 and Step 2 is the shortfall that you would like to replace with the life insurance c) Income generator One approach is to build a large life Insurance investment that would generate income earnings to provide a beneficiary with annual income. For example, Rs 30 lakh invested now at a conservative interest rate of 7.5% shall give perpetuity of 2.25 lakh per annum to family and children. While the benefit payable on death is tax-free, the income earned under this approach will be taxable and this needs to be taken into account. Once you arrive at a target coverage figure, it’s your individual circumstances which will dictate whether to use an endowment (par or non-par) life insurance policy, term life insurance, annuity or a combination. The insurance needs to be reviewed at least every five years taking into account change in circumstances, for example your change in lifestyle due to promotion or debt incurred
Posted on: Mon, 28 Apr 2014 04:47:37 +0000
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