Experts
always recommend that one should be adequately covered for life insurance so
that family is protected in case of death of the bread winner. But, most of the people find it difficult and
are in confused state as to how to calculate the exact life insurance one needs
to be covered with. Life Insurance
agents give different reasons and sometime not so convincing for buying insurance plans. They normally
always advise you to buy insurance products with investment component. In this
article we will learn how to calculate life insurance need correctly.
Let
us now understand how life insurance need is calculated. There are two most
commonly used methods to calculate life insurance need. First one is which is
advocated by insurance agents, human life value method and the other, one and
which is correct method is my opinion, is need based method. Human life value
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 is calculated on the basis of day to day family expenses till the life
expectancy of the youngest of the couple. 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 that one should buy life insurance only if one has
dependent/s who are financially dependent on his/her income . If you are
single/unmarried than you does not need to buy any life insurance cover. Many
unsuspecting persons are made to buy life insurance policy for their wife even
when she is a pure home maker. Likewise people are induced to buy child plans
with the trick of emotional blackmailing for their children’s future without
understanding the cost involved in such insurance plans. So neither buying of
insurance for pure home maker nor
accumulating corpus for child is advisable. Your life insurance need comes down
if your spouse is also working or to the extent 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 present loan or
any value of expenses which one will
have to incur in future like education and marriage of children.
Let
us take a live example to understand how to calculate life insurance need with
the help of 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 19 lakhs. He has 3 lakhs
in EPF account, 2 lakhs Mutual Fund Investment, 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. 1lakh each 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.
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 the
entire future outflow for his house hold expenses if anything happens to him
today. Let us calculate and understand the same in detail.
Rate
– Rate is inflation adjusted return assuming 9% investment return and 8% as
inflation.
Nper
– Number of years till life expectancy of the spouse i.e. assumed at 80 years.
PMT
– Present 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-
Rs. 68,84,382 is the family need today. This is not the final result which we
are looking. 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
insurance need easily as shown above.
You
should also note that if your spouse is earning then life insurance need will
come down to the extent of spouse’s 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 both financial underwriting and
medical underwriting. So it is always advisable to disclose all the material
facts correctly asked in the proposal form and also undergo medical tests as
required. Once you have done your job rightly no company can reject the claim.
This article first appeared at myiris.com on 10th April'2012. below is the link.
