How Much Insurance Do I Need?

Today I am going to delve upon how much insurance cover you need. I want to make it simple and easy to understand. Suppose you are between 20 to 40. (If you are older than 40, think again! You should have completed your insurance needs much before you were 40, since NOW you are going to pay a penalty for being over 40!). In the opinion of Insurance Companies, (and correctly so), the higher is your age, the higher is the probability of your death and more will be the cost of insurance. Take a simple case of a person who is 20 years old and another who is 40 years old. The 20 year old pays a annual premium of Rs. 5450 for a 30 year policy for Rs. 25 lacs, whereas the 40 year old pays an annual premium of Rs. 16925 for a similar policy. Both the calculations are for a product called Amulya Jeevan offered by the LIC of India, still the largest life insurer in India. The calculations can be verified by using the premium calculator on the LIC website. The point is, having delayed taking the basic insurance cover by 20 years, you pay more than thrice the premium to obtain the same cover. Now the next obvious question in your mind would be 'do I need a Rs. 25 lacs cover?'. Nothing is simpler than to answer this question. Remember the golden number 240. Divide this number by your age. If your age is 20, the division is 12. If your age is 30, it is 8, for 40 it is 6 and so on. Now this division multiplied by your annual gross income is the cover required by you! Suppose you are 30 and your annual income is Rs. 6 lacs, then you need a cover of around Rs. 48 lacs. (The division of 240 by your age is 8 and 8 multiplied by your annual income is 48). You need to make finer adjustments such as adding your loan liabilities to the needed cover and subtracting therefrom the value of your liquid assets. Thus if this 30 year old had a housing loan of Rs. 25 lacs (unpaid portion) and if his financial assets were say Rs. 8 lacs (deposits, shares, mutual funds etc.), the corrected cover amount is 48 plus 25 minus 8 i.e. Rs. 65 lacs. Any specific fund needs and other financial assets need to used for correction in similar way. Insurance is ideally done the day after you land up your first job. But then the annual income needs a correction.You don't get your dream salary in the first job. So you need to take for calculation the 'dream' salary or at least the reasonably 'expected' salary, commensurate with your CV.


Pl take out the calculators, find the insurance amount and rush to the insurance agent. (The later you go, the more you pay). But remember, PLEASE don't buy anything other than the pure term plan. ULIPs are, in a way, a big fraud, collectively perpetrated by the Insurance Companies and should be the last thing on your mind. I will write some other time, why ULIPs don't make any sense, and which plans are better for you, but till then, remember the bold font above.




Happy investing!!



Madhusudan

Disclaimer:

I am not a Certified Financial Planner and you need to consult one to assess your specific needs.