One of the most memorable scenes in the movie Titanic is when Jack Dawson sketches a portrait of Rose in the buff. While Rose did not need much cover, you do. Insurance-wise, that is.
Many people take a cover that they can afford. Some people take one which they assume as enough for them. There are some others who try to fetch returns on the money put in insurance by mixing up insurance and investment.
Insurance cannot be called as an investment, but an assurance that your loved ones will be protected in case if something worse happens to you.
Zeroing in on the level of protection needed
You must think about replacing your income for your family, covering your outstanding debts and other outgo’s like your children’s higher education, their marriage etc, which your family might struggle to pay for if you are not around.
There is no one-size-fits-all insurance solution; the amount of cover and how long it lasts will differ from family to family. Nevertheless, here are 3 scenarios.
Case 1: The go-getter
Vinay, a young employee, is earning around Rs. 80,000 per month. His wife Aarati is also employed, with Rs. 30,000 as her monthly income. They want to ensure that their insurance cover is sufficient to meet their expenses and needs, while leaving them a little surplus.
Assume that they have to cover a certain percentage of his monthly income. About 75% to 80% coverage is normally recommended. 75% of Vinay’s monthly income is about Rs. 60,000. Annually, it comes to Rs. 7,20,000.
Again, assuming that their insurance cover needs to sustain them for 10 years in the absence of Vinay’s income, their Sum Assured should be Rs. 72 lakhs. Likewise, if their coverage requirement is for 15 years, their Sum Assured should be Rs. 1.08 crore.
A simple minimum cover can be 10 times your annual salary, but you might want 15 or even 20 times your annual income if you have major outflows and a big family to support.
Case 2: The yuppie professional
Prem, a creative professional, is earning around 2 lakhs per month. His spouse, also a professional, gets around 1.75 lakhs per month. They own 2 houses. So, replacement income will not be a big issue for them. Here, what they need is more support for some major one-time family needs:
Child’s higher education: Rs. 20,00,000
Child’s wedding needs: Rs. 20,00,000
Homeloan settlement: Rs. 40,00,000
Other needs: Rs. 10,00,000
Total needs =Rs. 90 lakhs. So, an adequate Sum Assured for Prem’s family would be Rs. 90 lakhs.
Case 3: The plush businessman
Amit is a business man with a family-run business. His total existing assets, including all investments, is worth Rs. 50 lakhs. He can analyse his insurance requirements in 2 ways. Either he can consider the income replacement cover, or consider his one time requirements. Since it’s a family run business, he need to concentrate more on one-time expenses.
Since he has a healthy investment portfolio, he can use another approach for arriving at insurance cover required: Total requirement minus current assets.
The Troika of things that decide your life cover
Affordability: Affordability is a major factor to decide your coverage. The bigger the pay-out you want, the higher the premiums will be. So, if a higher premium leaves you gasping for breath financially, you’ll have to reduce the cover.
Liabilities: If you are the sole breadwinner of your family, you should think not only about replacing your income, but also to help your family in meeting the monthly repayments. But on the other hand, if you have taken mortgage covers like Home Loan Protection Plan, you can stop worrying about covering your liabilities additionally with a life insurance.
Other covers you have: Some employers will be offering life covers to all their employees, with a pay out of certain times of their salary. Some health insurances will have added life covers too. So if you are already covered by any other means check how much they will pay out in the event of your death. Then, you will have to plan for the balance amount only.
And importantly, once you have taken a life cover, don’t just stash the document in your locker and forget about it. A periodical review of your needs, changing lifestyle, needs for the new additions to family and new liabilities is needed to ensure that your cover is adequate.
In any case, with adequate insurance coverage, you will have more than a fig leaf to cover yourself, unlike a certain Ms. Dawson.