How much life insurance Cover is adequate ?

Few months ago When I meet one of our client Mr Joshi in his office, he was appearing worried , I asked him the reason for his concern and he said “ My brother who died recently has saved limited amount for his family , His daughter is still small and I am worried about her education , Also concern about his wife’s future “

I asked him “Sir , your brother must have taken any life insurance as well “ Mr joshi said “ Yes , he had life insurance as well but unfortunately its of just few lakhs “ I was surprised to hear this because both were having their business and earning well . I didn’t understand the login behind his brothers decision to take only few lakhs life insurance.

Sir , I know you had taken a good life insurance cover then how your brother didn’t ? You must have asked him to have good life cover!

Yes I had told him many times for taking good amount life insurance cover but he used say , What if I don’t Die during the period of the policy , All premiums paid will be wasted ..

All those who are reading this may be correlate this situation! even I had heard of this from many of the clients whenever we talk about Life insurance pure Risk plan i.e. Term insurance .

Let me try explaining this!

The purpose of the Life insurance Cover specially here the Term insurance is to Make up the financial gap which will occur in case you Die , For example – if at age 35 you are earning Rs 50000 monthly and expected to retire at age 60

So your total earning till the retirement will be -- 50000 X 12 X 25 =1.5 Cr

This Income will be utilized for funding the Financial Goals in your life like --

Child’s education – Rs 10 lakh

Marriage – Rs 15 lakh

Home – Rs 45 lakh

Car – Rs 4 lakh

Vacation – Rs 3 lakh

Retirement of you and wife – Rs 1 Cr

I have taken these figures as examples , Now out of these Goals Some may be luxurious goals or one’s which are not must , But some of the goals are crucial and must be fulfilled at any Costs . So in case you are not dying before these goals are achieved then you will be earning to create fund for it . If you Die then what ?

At this time your life insurance comes in the picture, In the above examples if we add the goals which are must to be achieved -

Child’s education – Rs 10 lakh

Marriage – Rs 15 lakh

Retirement of you and wife – Rs 1 Cr (For wire we can take it as 50 lakh )

The Minimum amount required for these goals would be – 75 Lakh ,

If you have the Life insurance Cover of Rs 10 lakhs only then from where your family will arrange 65 lakhs specially if your wife is housewife and no other earning member present in the family ,

In such case your family will have to compromise in their existing lifestyle , They may need to compromise on the education as well . May be your wife will have to take on some jobs , Your kids might be not getting all the facilities which they would have in case you were present in their life ..

The main intention of the life insurance is to fill the financial Gap in your family’s life which will be created if you are no more there , also in the goals which we had considered I have not added inflation effect or else the actual amount required would be may be 1 Cr + because as the Time passes Most things in our life becomes Costlier only …

You can recall the expenses you were making on basic needs 10 yrs ago or 5 yrs ago and today! you will understand what I really mean

To summaries –

1. Life insurance specially Pure insurance ( Term plan ) is not for investments but for covering risk

2. Choosing the Risk cover correctly is must , It should be enough to fulfill all the financial goals of your family if you are not there or else lower cover is as good as no cover

3. Calculate total fund cost after considering the inflation effect .

4. Normal thumb Rule for taking life insurance cover is = Your net annual income x 15 – 20 times

( your income documents will actually decide how much cover you can get )