How Much Life Insurance / Risk Cover Should Individuals Have?

There are to many types of insurances like Life Insurance, Health Insurance, Accident Insurance, Vehicle Insurance , Travel Insurance etc..

Individuals are always in trouble during taking decisions, is it for me? How Much Sum insured/Risk Cover Should I have? etc.

Life insurance: There are main two category Endowment Plans and Term Plans

  1. Endowment plans (Profit Related / Cash Value Insurance)
  2. Term Plans (non Profit)

Above listed are only basic types of Insurances, which are necessary in normal routine life. One question arises when we are ready to buy Personal Insurance and that is How much Insurance should I have?

Who Need Life Insurance?

Life insurance is not required for everyone. If you does not have dependents and enough assets to cover your debts and the cost of dying (funeral, estate lawyer’s fees, etc.), then Life Insurance insurance is total waste of your money. If you have dependents and you have enough assets to provide for them after your death (investments, trusts, etc.), then you do not need life insurance. However, if you have dependents or significant debts that outweigh your assets, then you need insurance to ensure that your dependents are looked after if something happens to you.

Need for Minimum Risk Cover

There is one normal formula that should be followed by person to calculate required sum insured.

It is essential that a particular level of income should be maintained for the family even when its Prime Member is not alive. Suppose a family’s present needs are Rs 30,000 p.m. The extent of life insurance for its earning members should be such that interest income from the sum assured can meet the family’s monthly expenses of Rs 30,000

Individuals Should have risk cover as per following formula:

Current income *100 *12 / Current rate of Interest= Personal Sum Insurance Required

for example if your liability is 30,000/- per month, and current rate of interest is 7.2 then your insurance should be:

30000 *100 *12/ 7.2= 50,00,000/-

It means a person earning 30,000/ per month should have sum insured for 50,00,000/-

But following points to be kept in mind while purchasing Life insurance:

Current Income Status

You Should not buy too much insurance without considering your current Income because payment of insurance premium may cause outflow of disposable income. Person have to take care to limit the amount of insurance keeping in mind the cash flow problems that may arise as a result of the regular payment of insurance premium.

Tax benefits

Take into account the tax benefit under Section 80C.

Advanced Planing for specific Future Need

If you have planned to spend particular amount in the education / wedding / business setup of your child, you can buy cash value insurance policy for an amount to meet such a lump sum requirement.

Present age

Your present age is on of the factor to decide the premium of insurance that you can afford. The rates of premium increases with the age of the life assured. Hence, one can buy more insurance for the same premium at a younger age than at an older age.

The final decision depends upon a careful considerations and balance of all the above factors. The need for minimum risk cover may be quite high, but the current Income may not immediately permit buying adequate insurance. You then have to make a set up and buy extra insurance as and when you can afford it.

What is Life Insurance an Investment or Waste of money?

Many people see life insurance as an investment, but when compared to other investment options, referring to insurance as an investment simply doesn’t make sense. Certain types of life insurance are touted as option for saving or investing money for retirement. These are insurance policies in which you build up a pool of capital that gains interest. This interest accumulate because the insurance company is investing that money for their benefit, are paying you a percentage for the use of your money.

However, if you were to take the money from the forced savings program and invest it in an index fund, you would likely see much better returns. For people who could not invest regularly, a cash-value insurance policy may be beneficial.