Suyash earns Rs 1.5 lakh a month. He has taken a home loan of Rs 80 lakh, and the house he bought has been rented out for Rs 30,000 a month. He has made some investments, which are now worth Rs 25 lakh. He expects to work for another 30 years, but at the same time he wants to ensure that his family’s income is not affected should something untoward happen to him. He bought a life cover of Rs 50 lakh 7 years ago. His agent has advised him to revisit his insurance cover given the high inflation, his higher income and better standard of living now. Suyash wonders how much life insurance is enough for him. Would Rs 1 crore be enough? The agent suggests 10-15 times of his annual income, which comes to almost Rs 2 crore.
Relying on random numbers or rule of thumb may be dangerous for Suyash. The question that he needs to answer is how the money his dependents are going to receive will be utilised. In case of Suyash’s untimely death, his dependents should be able to generate regular income to replace Suyash’s earnings, comfortably pay off all outstanding debt, ensure that the children’s future expenses and needs like education and marriage are taken care of. Notwithstanding the need to set aside enough funds to meet any financial emergencies. Suyash must begin by estimating how much would need to be invested to generate an income of Rs 1.2 lakh (Rs 1.5 lakh – 30,000) per month, his children’s future expenses and corpus for emergencies. Add to that another Rs 80 lakh that his family will need to pay off the home loan. All these must be extrapolated assuming the prevailing inflation rate, considering prices of everything will only rise over the next 30 years.
Suyash’s life is an asset that has the ability to generate income and assets over the life time. Thus, death is a risk that needs to be protected against. Arriving at the amount of life insurance cover needed is not rocket science. Suyash must stay logical and follow the steps.
(Content courtesy: Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta)
