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The right way to calculate your life insurance
needsExperts always recommend that the adequate amount of life
insurance should be enough to
protect in case of death of the bread winner. But, most of the
people find it difficult and areconfused about how to calculate the
exact life insurance one needs to be covered with.Life Insurance
agents may give you various reasons that are sometime not so
convincing in order
to make you buy insurance plans. They normally always advise you
to buy insurance products
with an investment component.This article will tell you how to
calculate your life insurance needs correctly.
Let us now understand how life insurance needs are calculated.
There are two most commonly
used methods to calculate life insurance needs.
The First one (which is advocated by insurance agents) is human
life value method. The other(which is correct method in my opinion)
is to calculate on a need based method.
The value of human life is calculated on the basis of income of
the person to be insured till
his/her retirement age. As against the human value method, the
need based insurance value iscalculated on the basis of day to day
family expenses till the life expectancy of the youngest
person in the family. One should apply need-based theory instead
of going for human life value
while calculating the exact need of life cover.
It is also important to buy life insurance only if one has
dependent/s who are financiallydependent on his/her income. If you
are single/unmarried with no dependents then there is no
need to buy any life insurance cover. Many unsuspecting people
are made to buy life insurance
policy for their wife even when she is a pure home maker.
Likewise, people are induced to buychild plans with the trick of
emotional blackmailing for their childrens future without
understanding the cost involved in such insurance plans.
So neither, the buying of insurance for pure home maker or
accumulating corpus for child is
advisable. Your life insurance need will come down if your
spouse is also working or to theextent of assets already owned by
you. Any existing or future financial liability needs to be
taken
into account while arriving at the amount of life insurance you
need.
The liability would include loans or any value of expenses which
one will have to incur in futurelike education and marriage of
children.
Let us take a live example to understand how to calculate life
insurance need with the help of an
excel application.Mr. Ronak aged 32 years working in a software
company draws a yearly salary of Rs. 6 lakhs.
He lives in Mumbai with his wife aged 30 years and 2 daughters
aged 4 years and 1 year. They
live in their own house which they bought last year for total
value of Rs. 30 lakhs. They have
taken a home loan of Rs. 20 lakhs and are paying home loan EMI
of Rs. 25,000 every month.The outstanding loan balance currently is
Rs. 19 lakhs. He has Rs. 3 lakhs in EPF account, Rs. 2
lakhs Mutual Fund Investment, Rs. 1 lakh FD and Rs. 50,000 in
savings bank account. The total
investment assets are Rs. 6.50 lakhs. His monthly house hold
expenses including conveyance,
education, life style is Rs. 18,000. He has two endowment plans
of sum assured of Rs. 1lakheach and is paying premium of Rs. 10,
200 yearly. He has some future liability in the form of Rs.
5 lakhs each for higher education of both the daughters and Rs.
2 lakhs each for marriage. He is
covered under group health insurance provided by his employer
for 3 lakhs under family floater.Now Mr. Ronak wants to calculate
his life insurance need with the help of excel.
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So he opened excel, selected formulas then insert function and
clicked at PV i.e. present value.
Present value function will give you a present value of all the
future outflow for his house hold
expenses if anything happens to him today. Let us calculate and
understand the same in detail.Check out how the calculation was
done on the next page
1) RateRate is inflation adjusted return assuming 9% investment
return and 8% as inflation.2) NperNumber of years till life
expectancy of the spouse i.e. assumed at 80 years.3) PMTPresent
yearly expenses of the family. Taken 80% of the total expenses
assuming
expenses will come down to the extent if bread winner is no
more.
PV- Calculating based on points 1 -3, Rs. 68,84,382 is the
family need today. But, this is not thefinal result which we are
looking for. We have to add loan liability and future goals. Also
have to
deduct present assets already generated and existing life
insurance cover. Self occupied home
and personal jewellery will not be the part of investment
assets. The final calculation will be as
under:
PV of House hold expenses today 68,84,382
Add: 1) Home Loan Liability 19,00,000
2) Education Goal 10,00,000
3) Marriage Goal 4,00,000
Total 1,01,84,382
Less: 1) Investment Assets 6,50,000
2) Life Insurance Cover 2,00,000 8,50,000
Actual Life Insurance required 93,34,382
Ronak requires life insurance cover of Rs. 93 lakhs.
These are very easy steps to calculate the life insurance need
with the help of excels but before
that you have to understand the basic things. Now, You can also
calculate your life insuranceneed easily as shown above.
You should also note that if your spouse is earning then your
life insurance need will come down
to the extent of spouses income. The same way you have to find
out the present value of future
income of your spouse and required to be deducted at the
end.
Life insurance proposal is subject to both financial
underwriting and medical underwriting. So itis always advisable to
disclose all the material facts correctly as asked in the proposal
form and
undergo medical tests as required.
