Following up from my previous article written some time back on Insurance. Here I am focusing on Insurance needs of an individual.

Life in today’s times is uncertain & can be very tough for the family if the main bread earner is no more due to any unfortunate event. I know it’s a taboo to talk about “death” but then it’s a reality one can’t run away from.

Hence adequate cover is absolutely necessary. Now the question I am sure you would ask is “how much”. Let me try to illustrate with an example.

Let’s take an example of an individual aged 35 who is married, earns about 15-20 Lacs per annum, has 2 kids & parents to support.

Most individuals in this age category would also have a home loan & possibly a car loan as well.

So, the individual would have the following liabilities as on date:

  1. Support wife, kids & parents – wife & parents until their lifetime, children until they start earning.
  2. Children’s ongoing education
  3. Children’s graduation
  4. Children’s marriage
  5. Outstanding Home Loan (most Home Finance Companies insist of Life Cover equal to loan)
  6. Outstanding car loan

All these expenses have to be inflated proofed as well.

There would be some assets that individual would have created over his earning span. But more often than not it isn’t adequate. The table below lists the liabilities & assets in this case:

Head Value as on date
LIABILITIES
1 Children Education – Graduation 24 Lacs
2 Children Marriage 20 Lacs
3 Retirement Corpus for Spouse 60 Lacs (invested @9%)
4 Family’s expenses for next 25 years Rs.50000/- pm & inflation at 6% pa 1.2 Cr
5 Any other expenses 10 Lacs
TOTAL LIABILITIES 2.34 Cr
Less Assets
Mutual Funds 10 Lacs
Existing Life Cover 25 Lacs
Other Assets 15 Lacs
TOTAL ASSSETS 1 Cr
LIFE COVER REQUIRED 1.34 Cr

(Current value indicates current cost of similar goal. The money received from Insurance will be invested until the goal is due)

In this case the shortfall is almost 1.3 Crores. In most of my interactions I find people either don’t know what cover they have, or it’s quite paltry & predominantly Traditional Life Covers. It’s heartening to see some 10% people actually talk about having Term Plans.

Most of the LIC & Insurance agents in general do not take a holistic view of your Human Life Value. Their only goal is to sell a policy & preferably a Traditional Plan for high commissions. It’s incumbent upon you to understand your needs or ask the seller to analyse & present to you. The Life Insurance business has a “Buyers Beware” approach.

The best life covers are Term Plans. They are cheap & provide large covers for a small price. The individual in this case can cover himself for just about Rs.25000/- a year for 1.34 crores. A Traditional Plan would cost you at least 5 times. I know people associate life insurance with return of premium & balk at the thought of spending on a term plan. However, the premium amount isn’t much. If you divide it monthly it’s just half of what you would typically spend on a weekend dinner.

Now the question is How to choose an insurance company? Look for 2 things:

  1. Cost per Lac of Insurance – cheaper the better
  2. 1 crore of cover cost Rs.20000/-.  1cr= 100 lacs. Therefore cost per lac = 20000/100 = Rs.200 per lac

 

  1. Look for historical claim settlement ratio of the Insurance company . a consistent 92-94% is a good benchmark.

Typically if you have been transparent & honest in declaring your health issues while taking the policy there is little scope for claim to be rejected.

 

Finally go for an online term plan. They are most cost effective option.

 

I hope this article gives you a sense of benchmark for your life cover. Happy to answer any questions.