Adequate Insurance cover

As we all know insurance is a protection tool. It helps to protect your family and love ones after any unfortunate event (your Death or Disability). But most difficult part is to ascertain your life value or income generation capacity . If you take higher cover than required then burden of higher premium can diminish family savings or in case of lesser cover, family may not able to cope the essential future expenses. Hence knowing proper cover is most important and essential step of your financial planning.

It creates another important question, how can we know the proper cover? And because there is no awareness and clarity what to do backed by biased advice ,customer end up taking many insurance policies still may not have a proper insurance cover. This situation not only affect saving capacity of an individual but on worst part his /her family still at risk of miserable life.

Let’s understand today how to calculate your Life cover or can say risk cover. There is two scientific method of calculation of Human Life Value.

1) Income replacement method:

In this method financial planner measures present value of client’s contribution towards family up to his retirement or working tenure considering appropriate discount factor. Here most important factor is to consider future changes/growth in income.

Let’s take an example: Mr. Rajiv is employed in IBM Limited earning 55000 per month , while his self expenses are 8000 per month and yearly tax is 40000.

Mr. Rajiv is expected to get 7% rise every year on his salary. His current age is 35 years and retirement age is 60 years. In case of Mr. Rajiv his yearly contribution towards family is 524000. Hence his adequate cover/HLV (in income replacement method) should be 1.48 cr. Mr. Rajiv’s family’s future in jeopardy if he takes less than 1.48 cr. or no insurance.

2) Need based Analysis: In this method financial planner ascertain future key expenses (inflation adjusted) of client’s life and calculate the cover required by him/her. As the name suggest only future needs are covered in this method i.e. Child education expenses, dependent’s expenses (Parents), Child’s marriage etc…

Example on Need based Analysis : Mr. Narayan Shetty is a working in Wipro earning 18 Lakh per annum his house hold expenses are 340000 pa. Lifestyle expenses are 240000 p.a. Apart from that he had a Home loan of 45 Lakh and paying EMI of 45000/ month. Mr. Shetty’s parents residing with him annual expenses on them is 60000.His age as on today is 32 years and he is planning to retire at the age of 58. His future expenses are as follows:

Neha’s (Child current age 5) Graduation fees 10L and 15L on post graduation on today’s value . He want to create a reserve 0f 15L for child’s marriage. 

He wants to change his car after every 7 years. Mr Shetty loves to visit different places and every year his expenses on such vacation are around 1 Lakh. 

He is planning to go abroad tour in every 4 years of now and create a budget of 4 Lakh for every such tour. 

He loves to throw parties on every occasion his yearly expenses are around 2L. He likes to maintain same lifestyle and want to create retirement corpus of 4cr.

He want to protect all his above said goals even if he is not there.
In above case understanding his Life important needs are important while suggesting proper cover. His most important needs where he required protection in case of unfortunate death are child education, child marriage, home loan repayment, dependent Expenses, retirement corpus for her spouse, house hold and normal lifestyle expenses. 

Assuming inflation rate is 7% and expected rate of return on corpus post death is 9%. His adequate Life cover is 2.19 Cr. as per need based analysis.

Individual should take a proper care and should ask agent or advisor to do the HLV for you and take that cover , Term plan is the purest and cheapest form of insurance available and you should go for it .Insurance is like twin blade sword if you know how to use it you can win the battles, otherwise you will hurt yourself.

This article is written by Mr.Hitesh Paliwal, Risk analysis and insurance consultant, ARB financial consultants.

You can reach him on : 8551905999