POSTED BY September 16, 2008 COMMENTS (42)
ONThere are lot of assumptions related to buying life insurance in India, because of underestimating the future non-life threats like job loss, accidents and also the life threats which will have a bad impact on your families future requirements in case of your untimely demise.
Today i will discuss about the calculation of insurance Amount one needs to protect his family even though he will not be there for them.
You will hear that it must be 6-7 times of Gross yearly income which is good enough estimate. but it does not consider other things like Debts or living style. It may be true for you but not for other. Some people may have simple lifestyle, whereas some other can have expensive lifestyle. So lets answer this question in another way.
This is pretty easy to answer, The life Insurance amount much be enough to –
While deciding the total sum assured, you need to consider all the factors that may affect to the financial life of your beneficiary when you will not be around. You should understand the expected cost of living for your family in your absence.
Some of the basic aspects that you should take into consideration in order to calculate the total sum assured are listed below:
- Calculate the total one time expenses which can be paid in lump sum also, like, Loan, credit card bills etc.
- Make a addition of all the assets like mutual funds, stocks, FD/RD, property etc. (Exclude those assets which your family is not willing to redeem or offset with the lump sum amount of liabilities)
- Deduct the liabilities from the assets ( or assets from liabilities in case liabilities are higher)
- Calculate the annual expenses of your family
- Decide the number of years for which you want to provide insurance cover
- Consider this amount for as a sum assured for your life insurance cover.
Let’s take an example.
Example :
Ajay is 30 yrs old and earns 40,000 per/month. He is married and has 2 kids. There monthly expenditure is 20,000 per month.
His investments are (total 8 Lacs)
He has 47,00,000 worth of Debts and expenses in future and monthly expenses of 20,000 , considering inflation @5% , which will also increase every year. His Insurance money should be able to pay for both of these.
We have to answer that how much money will provide 20,000/month (post-tax) or 2,40,000/year.
Considering 15-20% tax, the family should get 3,00,000, so that after paying tax they are able to get 2,40,000 per year. So how much money will give them 3,00,000 per year.
Fixed Deposits rates are around 9-9.5% per year. Which means 3,00,000 X 100 / 9.5 = 32,00,000 (approx).
So if they have this much amount in Bank which pays interest of 9.5% yearly, they will receive around 3,00,000 per year as interest and after paying taxes, they will be left with 2,40,000, which can meet there monthly expenses.
Also the insurance amount should have 47 lacs extra, which will be used to pay there debt and future expenses.
So total = 32,00,000 + 47,00,000 = 77,00,000
As he has 8,00,000 worth of investments also, His Insurance needs comes down to 77,00,000 – 8,00,000 = 69,00,000 (let’s make it 70,00,000)
This is the minimum amount for the insurance needs.
It should also be considered that the expenses will rise and some emergency may also happen. So insurance can be increased by 10-15%. But for the moment we will not do it. Its in fact not necessary in this case because the money for future expenses can be invested and which will grow .
Tracing Back
So we arrive at the figure of 70,00,000 . Now lets go back again and see that in case there is sudden death of the family head (earning member), how this money helps the Family..
They receive 70,00,000, Out of which they pay 24,00,000 of home loan
Money left = 70,00,000 – 24,00,000 = 46,00,000
They put 32,00,000 in bank or Monthly income plans, which will provide them with monthly income of 20,000 per month (post-tax).
Money left = 46,00,000 – 32,00,000 = 14,00,000
Now this 14,00,000 can be invested in Debt or Mutual funds which will grow to become at least 20,00,000 in some years (considering its needs after 10 yrs at least.
At the end of 10 yrs, when family needs this 20 lacs for there children education, they can use it. And for any emergency needs they have another 8,00,000 in investments.
So in general All the requirements of Family is taken care of. If insurance amount is less than 70,00,000 they will have to compromise at one place or the other.
Life insurance is an important instrument to make your dependents life secure, in case of your untimely demise.
Though there is nothing great in that, but most of the people miss on this part and according to studies, more than 80% of people in India are under insured, which means the amount there nominees will get will not be able to cover them against the financial crisis.
In case you have not read my previous articles on Life insurance, please read them
As I write this Article, I can see on https://www.click2insure.in/ that for a 30 yrs old non smoking male for 25 yrs of cover, the minimum premium per year for 70,00,000 Term Insurance is Rs.21,000 per year (taxes extra).
The premium is just 4.4% of this yearly income. Just imagine how cheap term insurance for total peace of mind for rest of the life.
Insurance cover = A + B + C – D
Where,
A is Money which can give you monthly income = Monthly expenses * 12 * 100/(interest rate which bank gives in a year , example 9.5%)
B = Future Debts or Expenses.
C = Some money for contingency or emergency.
D = Your investments or Assets (excluding HOME)
If you are under insured, please take extra life insurance and cover your family. You can also buy insurance under MWP act.
Please read my earlier articles on Term Insurance to understand more.
I would be happy to read your comments.
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Dear Manish,
Im going through your article One by one to Understand Insurance better. On enquiring and reading I heard term Insurance is better. On seeing your Many article confused which One to read first. Can you help me in making things in order to read. And Need one more imp help from you.
Im 25 Unmarried getting an monthly income of 30K PM. I dont have any assests ( Only dad is having ) . Advice me for how much I need to take term Policy and in which Company please. Could see many Maths calculations. Worried because of this.
The first question you have to ask is – “Is someone financially dependent on me?” . What is your answer ?
Manish,
Wonderful article on calculating ones life insurance amount. Yes, its always wise enough to split our insurance amount between 2-3 insurers.
Chetan
Actually splitting was good long back when premiums were a bit high . Now a days I dont suggest splitting !
I am 33. I took out 2 LIC life insurance policies, in 2005 for 15 lakhs (18 years) with premium 73000 and in 2010 for 15 lakhs (25 years) with premium 91000. Am i paying too much and can I change my policy now?
In your formula for calculating the insurance requriement, the impact of inflation on monthly expenditure is not considered. In an example, if monthly expenses are Rs.25,000/- and interest rate 9.5%, the insurance requriement works out to about Rs.37.89 lacs (with a built in contingency of 20 %). The monthly interest on Rs.31.57 lacs (sum excluding contingency) is Rs.25,000/-; as this amount will increase over time due to inflation, the monthy requirement after 10 years will be almost Rs.50,000/ assuming 7 % rate of inflation. How to factor this in calculating the insurance requriement.
You may also like to add a few comments on people who do not require insurance (persons without dependants; working couples without children or independant children).
Ramadevi
Yes , i agree that it was not included, as it was an old article , i will make the relevent changes in this !
Wow! what an article…..thnx for ur efforts…its really great..
hi manish
i am grateful to u for your blog .i have certain questions regarding insurance cover which we need(my husband and myself)I want to share some details
1. we have a house loan whose outstanding amt is 2100000 at present .loan is for 25 years term.the loan amt is covered by insurance done by bank itself(sbi)
2.we have few policies of lic jeevan chhaya,jeevan saral,pension plus,wealth plus
premium for pension plus 32000pa,wealth plus rs 20000pa for three years and remaing two policies premium amt to45000
3 we have one icici prudential health plan (prm 4000) and one ulip pension plan (pr 10000 pa)
4 we have one daughter (5 yrs) .my mother in law is 75 yrs and dependent on us.
my husband salary is 8.5 lac pa.and our monthly exp are around 48000 incl home loan and car loan emi.how much should be our insurance cover.my husband age is 33 years
any review of SBI lifs smart shield . i want to purchase it.
http://jagoinvestor.dev.diginnovators.site/forum/
Hi Manish Jee ,
First of all , I want to thank you and this website’s team for proving such an important and valuable guidance on financial planning.
I need help on insurance cover from your channel’s experts.Kindly consider my question through mail as I can’t be able for recording due to my office timings.
My annual Salary is Rs. 144000 /-
My monthly expenses are Rs .8000/-
I save around Rs. 48000 /- yearly
from my savings I can invest Rs. 10,000 on insurance cover yearly.
Now I have searched in some insurance companies’ web sites and in advertisements that the term insurance cover of Rs. 50-60 Lacs for 25-30 years term ,you can have by paying premium upto Rs. 10000 yearly.
In my case I am capable for paying Rs. 10000 yearly but will the insurance companies give me term insurance cover of Rs. 50 to 60 Lacs as my annual income is Rs 144000 /- ?
Can I ask for high insurance cover against my lower income from insurance companies ,as I am capable to pay their yearly premium amount, which comes under my yearly savings ?
Presently, I am single now.I have neither any insurance cover nor any investment for future and my current age is 26 yrs.
Thanks With Regards,
Mehul pathak,
New Delhi
Mehul
generally as a thumb rule , the insurance cover is around 10-15 times of annual income . So It might happen that they might not give you such a higher cover . But again , I am not sure how exactly they decide this . . but you can try to take that much cover , see what happens .
As another option , you can take a lower cover first for 20-25 lacs and then in a year or two you can take it from another , anyways you should take it from two companies .
Manish
Manish,
— You have missed to include corpus in Employee Provident Fund account in the calculation.. which will be one of the major contributor
— Most of the employer has Group Term insurance – A BIG corpus missed in the calculation
— The monthly expense will go to 40k in next 12-15yrs and corpus required MIP should be revised..
Hi Manish
I am 30 years old and am currently happily unmarried :D. My Annual Income is roughly about 7.2 lacs pa. My total contribution towards PF( EPF + PPF) is 75k, which I wish to continue in my coming years too.
Recently I purchased a small flat from my saving + taking loan, with total outstanding loan on me being 15 lacs (for outstanding period of almost 20 years). I will be moving to my flat by February , 2011. My flat is covered under insurance for paying off my debt in case of my death.
My monthly take home salary is roughly 50k. My current monthly expenditure excluding the loan EMI but including the house rent is around 15k. I own a car( bought in 2009(, and monthly expenditure is around 5k on same, this is included in my total expenditure.
Once I move to my new flat, my rental expenditure around 6k will be saved and my expenditure on car is expected to be same as the distance from office to my new flat is same as current flat.
I have a term insurance from Bajaj Allianz for 15L/35years premium 7k approx, purchased last year. Currently while looking for covering myself to pay off flat debt, I found that the premium to my current insurance is too high, for that premium I can buy a new term insurance for 30 years for a very high coverage and am planning to switch to same
I also wish to invest in pension plans like NPS for retirment benefits.
My questions to you are
1. is my decision to switch my Insurance is wise enough
2. I am looking for higher coverage now, and as I see above, I notice you advising people to invest in more than 1 insurance plan, and all the time i see you mention LIC as one of them, though the premium in LIC is higher compared to any other insurance companies, is there any special reason for that ( as one of my friend commented “LIC is still the trusted one when it comes to payment after death” is this the reason for you also mentioning the same)
What should be the ideal insurance plan I should be looking for and what insurance plans would you suggest me.
Thanks and Regards
Sunit
Sunit
1) Yes , please increase your cover asap . Thats most important . Even if you dont want to close your current policy , you should be taking term plan anyways
2) Most of the people themselves want LIC as one of the option , so I also tell other thats fine, go with LIC . But its not 100% necessary. You can go with other insurance companies also like ICICI + Kotak or HDFC + Aegon Religare !
as of now LIC claim settlement is the best, but the premium is higher .
Manish
Hi Manish,
Nice to see your posts. One of the Agent from Birla Sun Life Insu have suggested one endowment plan-> Bachat (Endowment) plan. Here they r telling minimum Bachat Addition rate is 5.5%+Loyalty addition =9.43%/year. The formula given below,
Bachat Addition = Sum of all MBP’s paid to date x Bachat Addition Rate
here, MBP=Monthly Base Premium and bachat Addition Rate is 5.5% this year.
Loyalty Addition = Sum of all Bachat Additions earned to date x
Sum of all Bachat Additions earned to date / (240 x MBP)
They have suggested to invest 30,000/year for 20 Years and the survival amount will be 11,46,604 if minimum bachat addition rate is 5.5%. According to them and the policy doc, this rate will be decleared by company every year and it should not be less than 5.5 %. It may increase every year.
Please give your advice on this.
Subhajit
Endowment plans = NO . Does it look appealing to you ? Can you understand yourself how this all works , it seems to be too complicated , your financial life is what you buy , if you buy this , its complicated .
Manish
Hi Manish,
It is a really useful article from you, which I found while searching on google.
Can you also suggest which is better plan for Term Insurance.
I have one from ICICI covering 25K for 30 years at Rs.4100/year, which I want to increase before next premium. I am not sure MYNC or LIC has better plan then this.
Could you please suggest?
Thanks!
Daman
Is it 25k or 25 lacs for 4100/ year ? Is it a term plan ? Better split it between LIC and ICICI or LIC + Kotak
Manish
Hi Manish,
Sorry, its 25 Lacs. It is a term insurance. How does the insurance claim work for multiple policies, as you suggested?
Do you already know some plan from LIC which you would like to recommend?
Daman
Daman
See this for your query : http://jagoinvestor.dev.diginnovators.site/2010/09/9-most-asked-questions-about-term-insurance.html
Manish
Hi manish.
I appreciate to open my eyes from the sweet but tarrable dream of Endownment and money back, whole life plans.
Could you insure me that how long i can take the benifits from TermInsurance..(Means……… The maximum age of taking termInsurence)
also tell me IS TERM INSUREANCE PROVIDE ACCIDENTAL DEATH BENIFIT????
Rajat
You can take Term Insurance upto 60 yrs and sometimes 70 yrs , but its of no use at that time , You need it NOW .
It covers accidental death .
Manish
Hi Manish,
Where have you used 5% inflation in your calculations ? I guess you have calculated 2,40,000 per year for 25 years which will increase per year by 5% but thats not part of the calculation .
Abhishek
Abhishek
Actually this is an old post, I have not considered increasing inflation in the calculation , better use calculator mentioned at top of blog to calcualate
Manish
Hi Dear,
I am 40 year old, having wife and 2 kids (12 yr and 7 yr).
My monthly take home is about 1L and avg monthly expenditure is about 50K. There is no liability for me at the moment as I have paid my home loan already.
In your opinion what should be my term insurance cover and more importantly from which company I can buy cheapest term insurance?
Regards
Mukesh
Mukesh
You can calculate your insurance here : http://jagoinvestor.dev.diginnovators.site/calculators/html/Insurance-Calculator.html
Manish
Yes sir,very bad part,you know ITS THAT PART OF LIFE!!!
So i got my mistake,now i m looking for a term policyy of 8o L,did some research on it.found LIC’S jeeven amulya to be good with yearly premioum of 29,200 for 35 years.
Now since i m not married,not planning for kids education and all now.(Saving money for marriage first 🙂 ).
But how to go about retirement,wld EPF+PPF work here ,so shouldi opt for pension plans etc by different banks and if then which one is gud one.
Thanks Manish for all your help,its a great initiative but going forward will bug you more about these things
Thanks again
Vikalp
Vikalp
You can take insurance from LIC , However try to split it with two insurers .
Regarding retirement , because of young age the main tool to be used is equity . better plan with Equity funds , ETF’s and PPF+EPF .
Manish
hi manish,
i needed your guidance regarding my insurance needs.I followed your calculations and what i calculated is below:
1.i want my family to have a monthly income of Rs 30,000 .Assuming tax to be 30% and return by bank to be 7%.This gives me an amount of
Anuual amt=360000*100/70=514285
corpus needed=514285*100/7=~74,00,000
i am not married and i am 29 years old,annual income of arnd 8 L.I see a exp of around 45 L or more ahead as in home loan and childeren education etc.It come to be around more than 1 crore.This is to much amount for me.I have investments of around 1 lakh now.
How should i go about my planning?
plz help
thanks
vikalp
Vikalp
There are some things you have done in wrong way . One of them is to arrive at figure of 514285 . tax is not calculated in a flat manner like you did . if you want after-tax income to be 3,60,000 in todays world , it would be 3,90,000 only . because its just 20% till 3-5 lacs (thats 18,000 if amount is 3.9 lacs) and then 10% from 1.8-3 lacs (than 12,000) so total tax would be 30k if taxable salary is 3.9 lacs and then the final amount would be 3.6 lacs . This is first mistake you did .
Now the corpus needed would be 39000* 100/7 = 5571428 .
Now there are other issues . the first thing is that in future the tax structure would change so the tax would be less compared to today or may be you dont even have to pay tax at all on the amount you get at end considering you have all in equity , as per current tax laws any profit after 1 yr is non taxable . Any amount your receive from insurace claim is not taxable (sec 10)
Now comes the main point of how to save . Did you find the per month contribution required from your side to achieve your goals of retirement and child education . I suggest you do some calculation first and find out things. How to do it try finding it yourself on this blog and other websites and if you dont succeed , then i will tell you .
Btw , take a term cover asap , you are in bad shape right now ..
Manish
@The Green Man
Thanks
1. You should go through http://jagoinvestor.dev.diginnovators.site/2009/10/what-to-get-rid-of-your-junk-insurance.html
2. If bank interest (after tax) is more than loan amount , then it makes sense to keep money in Bank , else not ..
but thats not the case usually 🙂
@Mohan
My Pleasure 🙂
Manish
Dear Manish
great to see you writing with so much of enthusiasm!!!!
kudos and keep it up…
Only one thing that i do not agree to is your point of Rs 32 lakh requirement for getting Rs 20000/- per month.
As you said Rs 32 lakh will fetch pre tax Rs 304000(9.5%) and accordingly Rs 240000(Rs 20000/month) after paying tax.
Rather it should be this way:
1. Rs 300000(pretax) is required for dependents(Spouse i have assumed)
2. Assume my spouse age is 25 and she is to insured for her expenses till her age of 80.
3. I feel insurance requirement is quite simple i.e. 3 lakh*55 (80years-25years) 1.65 crores.
4. Rs 1.65 crores is way above the amount of Rs 32 lakh that you mentioned in your blog.
5. i will explain how is it??? say at unfortunate demise , she got Rs 1.65 crores. what she needs to do is to consider it as 55 equivalent amounts(parts) of Rs 3 lakh each.
first year she will be using one part of Rs 3 lakh for her expenses.
2nd year , 2nd part of Rs 3 lakh + return (assume equal to inflation) on it which may amount to Rs 324000 approx (8% assumption) will be enough to meet her inflation adjusted expenses.(REMEMBER HER EXPENSE FOR 2ND YEAR WILL BE HIGHER BY 8%).
and same way 55 parts(amounts) will take care of her expenses even at the age of 80.(REMEMBER HER EXPENSE AT THE AGE OF 80 WILL BE 300000 * (1.08)^54 = Rs 19142738 WHICH WILL BE MET BY 55 TH PART OF RS 300000 DISCUSSED ABOVE)
6. As explained above, had my spouse age be say 40 and she is to be insured for her expenses till her age of 80 then requirement would have been just Rs 1.20 crores. 3 lakh*(80-40).
Manish Sir please correct me if i am wrong in interpretation?????
Regards
Sumit Gilhotra
Sumit
this one is very old article and i didnt take inflation into the account ,like you did . I agree with you .
Manish
manish, that was an excellent post. I really love the way you analyze and put it across in lay man terms. Keep rocking!
Hi Manish,
Excellent post.. I have been reading some of the material on this blog and you guys are doing very good job of writing on personal finance stuff. My parents have always bought the money back policies. I read about the term insurance only recently and I had such a tough time explaining it to my parents that is actually a LOT better than the money back policies. I am 27 yrs old and I have a term insurance of 50 lakhs and if I take on more debt in the future I will also take additional insurance.
I have two questions for you
– what to do if you already have got some money back policies and have been paying the premiums for 3-4 years now? Sadly enough when I was not that keen on managing personal finances I asked my dad to buy some insurance for me for tax saving purpose and he obviously bought me 2 money back policies.
– In the example case above you are assuming that the family would immediately pay off the housing loan that Manish had taken.Is that mandatory ? Why cant the family put that additional money into the bank as well, and let it earn interest and pay the loan with that money? (Assuming that the home loan is a lower interest than the FD interest rate ofcourse)
Ahh, i changed that ..
thanks for pointing it ..
There is a typo. when the family puts 32lakhs in back, the interest they may get is 20k, not 20lakhs per month 🙂
It’d be fantastic if they get 20lakhs, though.