Wednesday, January 17, 2007

How to Calculate your insurance needs

The main thing what the insurance guys miss out while selling is trying to find out the exact take home income and the family needs, than pushing for tax benefits.

For example, if a person's take home is 6 lakhs (50K monthly) and the family expense all inc is about 25K, the nett savings would be 25k, and he or she can/should invest only 40% of that amount in insurance.

Simple, how did I arrive at the formula?

Well the basic need of a person is to save for his family, right? So the investment is to be in the Stocks, Mutual funds, gold etc. So 30% should go to that of nett. Now left with 30%, which can be used for his long term needs, vacation, emergency funds. So the rest is 40% for insurance. Out of which the mediclaim for a reasonable amount of 10K per annum to be kept aside for the family. Now the rest is available for insurance manipulations.

Now the quantum of needs...

First based on the average inflation adjusted returns for a 30 year old is 8.5%, hence for example, if the family is spending at 25K or 3 lakhs per annum, the logic would be to have 75% of that when he is not around. (We have to remember there is some nest egg and properties, additional). That gives an amount of 18,750 monthly (225,000 annual). So the termlife insurance amount to be (sum assured) would be 26,50,000/-.

Typically the premium would be at 0.5 to 1% per lakh for a termlife for 25 years. So the outgo is, Rs 26,500 max per annum. This to considering the money back policy, if taken, would suffice. Keeping the survival, and the children's earning age, one should try to be insured till 70, with the excess income each year set aside for ULIP investments or a combination of termlife and mutual funds (giving extra yardstick).

This should be taken with utmost care with the following example (as above)

Take home - 6 lakhs
Expense - 3 lakhs
Savings - 3 lakhs

Mutual funds/Investments - 90,000
Emergency funds/house - 90,000
Mediclaim - 10,000
Insurance - 26,500 (not to be more than 25% of any income)
ULIP - 83,500 (long term - for all in family).

Now the other question, typically asked to me is, what if my income is below above example? Well, use the percentage, keeping in mind ULIP comes last, to tide the market with insurance as well.

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