Most of us are clueless on the insurance we have to buy, let alone knowing how much of insurance is good for you? We invest most of our time, understating different types of insurance policies that insurance companies offer. Although it is a good practice trying to understand the type of insurance that suits you the best, what you need to stress on is also how much you need to invest.
When planning for any type of financial investment the best practice is to first understand your requirement and then hunt from the array of investment options that the market has. However most of us leave the most important part which is to analyse the requirement first, and head straight to the type of polices that are available.
In India when calculating insurance requirements, importance is given to the human life value (HLV) method. HLV only considers how much income the individual earns, which makes it an incomplete way of calculating our insurance requirements. With the type of options the HLV considers, the calculation is inappropriate for the long run. For e.g. HLV considers todays drawn salary as reference for any type of future necessities. Future emergencies like accidents, job loss etc are ignored, this does not give a right estimate of your insurance requirements that you and your family require.
If you are looking for an insurance coverage it is usually to ensure that your family is self reliant and financially stable with enough money to pay off loans and meet expenses. After the death of the policyholder especially if they are the sole bread earners in the family, expenses shoot up. Expenses such as education, monthly expense, loan settlements, medical expenses , etc., need due importance. Inflation rate is most important and needs to be taken into consideration, what costs Rs 100 today will raise to Rs 1000 tomorrow due to inflation. It is therefore important to take into consideration factors that will affect the future of your family, these needs to be linked to the type of insurance you are looking to buy.
Considering and following an anticipated approach when calculating your insurance needs for the future is the right way that will give you a realistic estimate of what your family will require. This in turn determines how much insurance you will need for you and your family.
Having discussed what you need to consider when estimating your insurance needs, now let us look at certain rules that determines how much insurance you require.
Debt cover financial need
Before you invest your money into buying insurance the first rule is to ensure that the cover is enough to meet the family’s financial requirement as well as repay all debts the family owes. When calculating your insurance it is advisable that your cover is 10-12 times more than the annual income you currently earn. For e.g. if your earnings is Rs. 60,000 per month you should choose an insurance cover that is greater than (60,000 * 12 = 7,20,000) *10 = Rs 72,00,000.
Another rule when calculating how much insurance you need, is to take into consideration the monthly expense/income your family will need after your death. It is important to consider lifestyle, household requirements as well as education expense your family is sure to encounter. It is sensible that you add in any liabilities e.g. loans taken so that those can be covered as well . Lets look at an example to understand this rule better. If Raj has an existing home loan of Rs. 50 lakhs, while the family’s monthly expense is Rs 30,000 your insurance cover should include all of these expenses as well as take inflation into consideration. Inflation rises at the rate of 4% to 6% every year.
With these two important rules in place while considering how much insurance you need for your family you should be good to go. Your insurance cover will also depend on the number of dependents you have in your family. For e.g. children will have education expenses or even higher education expenses that need to be met. You need to take into consideration the rising cost of education. The education expense applicable today is definitely not going to be the same a few years down the line. You might want to consider their marriage expense if you’ve planned on footing this expense.
Similar commitments towards your children and your family need to be consider before you buy an insurance. Taking all of these expenses into consideration will give you a rough estimate of how much you need to invest and the period you can invest in.
Of course if you have thought of investing in insurance later in your life, your premium payment will increase. Hence it is advisable you invest in insurance as soon as you begin your professional life.