Met a gentleman recently who very proudly shared with me that he pays Rs 90000/- per annum as the premium towards his 10-12 insurance policies which he has accumulated over the years. I talked to him for about 10 minutes and learnt that his 10-12 insurance policies provide him a cover of approximately Rs 15 lacs. Is it a sufficient amount I asked? He said 15 lac kam hain kya? More over I save tax. Is it not an important reason to buy insurance?
He was not the first such guy I had come across. The average life insurance cover of policies sold in 2010-11 was Rs 1.93 lakh I recently read some where. By that logic his 15 lacs insurance cover is pretty decent, however not sufficient by any standards. Buying life insurance is a national pastime in India. After bank deposits, it is the most favored destination for household savings, accounting for almost 25% of the wealth of small investors. Yet, most of us have no clue how much insurance we need. And what kind of insurance one should buy.
Let’s take the example of this gentleman. If some day he doesn’t reach home, his family gets Rs 15 lacs from the insurance company. Rs 15 lacs invested in a bank FD at 8% would give an annual return of 1.20 lacs. Is this amount sufficient to sustain the same standard of living assuming prices do not go up?
The table below explains the calculation of human life value for Mr A and gives a fairly good idea how much protection cover is required, if he doesn’t get up one morning from his sleep.
Annual income Rs. 4,00,000 per annum.
Taxes & personal expenses Rs. 8,000 per month
Net monthly contribution to family Rs. 25,000 per month
Net annual contribution to family Rs. 3,00,000 per annum
Bank FD rate 8%
Human life value calculation 3,00,000 / 8%
= 3,00,000 / 0.08
= 37,50,000
Insurance amount required (HLV) Rs. 37,50,000
Rs 37,50,000 invested in Bank FD at 8% interest rate will give annual return of 37,50,000 × 0.08 = Rs. 3 lakhs per
annum.
This method will ensure that the family will continue to receive Rs. 3 lakhs per annum as long as Bank
FD rates stay at 8%. This method assumes that the annual salary will remain constant at Rs. 4,00,000
throughout, and does not take into consideration any expected increases in salary. It also assumes that
Bank FD rates will remain constant at 8% throughout, and does not take into consideration the increase or
decrease in interest rates.
Some financial experts feel that protection amount must be at least ten times the average annual income.
As age increases human life value diminishes. Hence an appropriate way would be keeping the age of the insured in mind.
Age Amount of Insurance
21-40 Yrs 20 times the average annual income
41-50 Yrs 15 times the average annual income
51-60 Yrs 10 times the average annual income
61 and above 5 times the average annual income
Human life value is not a one-time calculation. It is an ongoing process which needs to be revisited from time to time. Stay Insured. Stay Blessed.
Very true. And as we all know prices will go up, insurance cover must be re-assessed from time to time. I hope that gentleman takes some sound advice from you.
ReplyDeletekeep sharing your thoughts here. :-)
very true.nice one.
ReplyDeleteTrue... "Human Life Value" - It needs a lot of awareness. As of now it is something that most of the people might not have even heard before. So understanding the same is a big question. Today people relate insurance as one of investment tools rather taking it as a tool for financial protection / security.
ReplyDeleteNice article, very well explained.Irony is that even after so much marketing and awareness campaigns people take insurance only as a tax saving instrument.
ReplyDeleteIts very true and very nicely explained, keep your awaareness programme continue.
ReplyDeleteVery interesting information...Actually even the most educated people in our society have no clue how much coverage they require...
ReplyDeletewonderful vandana !! Young India wants a good financial planner/ counsellor like....
ReplyDeleteMost of them lack financial literacy in this country. All we care about is how much i pay how much i am getting how soon will i get that amount. Sales executives sell products to meet their targets, in the process sell products that the customer does not need,..Our agenda should be to spread financial awareness and help those who seek advice.
ReplyDeleteIts very true, the things happen for the money.
ReplyDelete