Wednesday, 4 May 2016

How Much Insurance Do I Need

Life Insurance acts as an important tool in wealth creation for an individual helping him achieve long and short term financial goals.

Everyone Needs Insurance,But the problem is many doesn't know how much Insurance is required, whether they are under insured or over insured. More ever people think Insurance is more of an Investment rather than a mere Risk Mitigation tool.

Insurance should only be purchase for earning member of the family. I have personally seen many insurance agents selling child insurance plans which is an utter non-sense

The problem actually is with the insurance agents who rather then securing your life due to unforeseen event, look for hefty commissions from Insurance companies and forces you to purchase  Endowment policy or Money Back policy or child plans or Unit Linked Insurance Plans and what not.

Every Individual should go ahead with a term insurance policy which is a perfect fit to cover risk. Few Insurance agent's would suggest you for term insurance as commissions are too low because premiums are too low.

Let me help you with an Illustration 
Mr Sharma , aged 35 years , Married and having 2 children , earning a gross income of Rs 10 Lakhs , post tax income is taken as Rs 58,333 per month.
Mr Sharma has an LIC policy of Rs 10 Lakhs
Imagine if due to sudden demise of Mr Sharma , His Nominee Mrs Sharma will receive Rs 13 Lakhs (Assuming accumulated bonus of Rs 3 Lakhs) from LIC
If Mrs Sharma would keep this money in a Fixed Deposit at 12% (higher side) interest rate then yearly interest would be Rs 156,000.
Let us divide Rs 156,000/12 to arrive at monthly income = Rs 13,000
Imagine an Net Income of Rs 58333 is suddenly reduced to Rs 13000

Simple formula for how much Insurance required is
(Gross Income/ Current Interest Rate offered by Banks )* 100
In Mr Sharma's case he would have required an insurance of 
10 Lakhs / 8 *100 =1.25 Cr

Mr Sharma already had an insurance of Rs 10 Lakhs with LIC and he needs to insure another 1.15 Cr 
If Mr Sharma had to investment in Money Back or Endowment Policy premium would have been around 5 Lakhs a year which is not feasible and the returns are mere 6% which doesn't even beat inflation.
Mr Sharma should opt for a Term Insurance Policy of Rs 1.15 Cr resulting in safeguarding his family in case of sudden demise 
Lets do the maths now 

Rs 11500000 ( Term Insurance ) + Rs 13 Lakhs
LIC Policy (Including Bonus)= 1.28 Cr 

1.28 Cr / 8% = Rs 10.24 Lakhs Yearly Interest Rate Income
Rs 10.24 Lakhs / 12 = Rs 85,333

His Nominee Mrs Sharma would receive Rs 85333 every month assuming an interest rate of 8% in bank fixed deposit which would not only take care of her household expenses but also higher education for both kids.

In the next article i would write about how to achieve wealth with term insurance plus mutual fund , wait for the same folks and i hope you enjoyed reading the article 

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