Cover your life,adequately

While insurance is a must if you have liabilities,having the right amount of cover is critical

Kartik Varma & Dhruv Agarwala | Published:February 2, 2009 12:20 am

Do you have the right amount of life insurance? If you are unclear about the answer,chances are that you might not have relevant amount of coverage.

Most of us end up buying insurance for wrong reasons,usually to save tax during the final months of the financial year. As a result,we either have a little too much insurance because some smooth-talking sales agent talks us into buying a fresh policy annually,or,too little insurance,because all we buy insurance for is to take advantage of tax savings without regard for the right amount of coverage.

Purpose of life insurance

The purpose of insurance is to replace your income when you are no longer there to support those who are financially dependant upon you and to fulfill the financial obligations that you are contractually bound to.

For instance,you might be the sole breadwinner in the family and have a ten-year-old daughter whose wedding expenses you will need to bear in fifteen years’ time. However,if something happens to you today,your daughter will still need to incur wedding related expenses but might not have a surviving parent who can afford it. In such a case,an insurance cover comes in handy as it takes care of such expenses.

Amount of coverage needed

So how much insurance is adequate? There is a simple calculation that can help you analyse how much coverage you need. However,the amount of coverage you need might vary from time to time depending upon your then prevailing life situation. Industry practitioners often prescribe that the amount of insurance one should have should be 5x – 10x one’s current earnings. While this is directionally right,it is possible to get an even more precise answer.

The amount of insurance you get must have some relationship to your current and potential earnings capacity. One way of calculating that is to first find out your current and future financial obligations. For instance,how much do you pay for your spouse’s living costs if he/she is not earning,for your child’s expenses (education,marriage) until he/she becomes financially independent,how much will you require to pay off the outstanding loans,if any. The sum of all the above obligations will give you the total amount of protection that you need. Once you have this amount,subtract from this any assets that you might have. These can be liquid cash that you have in bank account,current value of stock market investments,existing property or assets,available share of inheritance from parents,investments made for retirement such as PF,PPF,et al.

The net of the above two amounts will tell you whether you are over or under-insured. If the sum of your assets and existing policies does not cover your financial liabilities,then you are most likely under-insured.

If you have no financial dependants,then most likely you do not need any life insurance coverage. Similarly,you don’t need to buy life insurance for your school-going children because they do not have any income and they are not supporting you.

Revisit life cover regularly

You must evaluate your life insurance coverage annually or in the very least whenever your life’s situation changes. Every change like getting a new job,changing cities,etc can alter your financial situation. u

The authors are co-founders of,a Delhi-based financial advisory business.

Check list

• You don’t usually need insurance if you do not have financial dependants

• You don’t buy insurance for kids because it’s not a financial loss if they were to die

• Evaluate your insurance needs annually,because your needs change with lifestyle

• Identify the cheapest and most efficient option. Not all policies are suitable for everyone

•þ Don’t think of insurance as a tax saving alone,think of it as a protection instrument

Who is a financial dependant?

A financial dependant is any person who is dependant upon your income for his/ her expenses and living costs. This,for instance,can be your spouse who might not be working,your children and retired parents.

Simply put,your financial dependants are persons whose lives would be materially affected if your income were not available to provide the support and assistance to them.