How much insurance you require?
It’s a big question when you think of purchasing an insurance plan,
Many of us think insurance as an investment product here is where we make a big mistake remember one thing that insurance is not an investment product as it gives less return as compared to other investment products available in the market.
first and the foremost one should know “what is insurance ?” before buying an insurance, in simple terms insurance is an assurance that you give to your dependents that their current lifestyle will not be effected in case you left the world or become unearnable. So the question arises of how much insurance cover (the amount which you will get after you pass away leaving dependents behind) one should have.
The thumb rule that is in practice in insurance industry is that the cover one normally should have is ten fold of his annual income suppose your annual income is Rs. 5 Lakhs then you should have insurance cover of Rs. 50 Lakhs, this is what we normally see the expert speaking about cover on television channels.
Now the question arises an tenfold amount of cover is the only way for arising the insurance cover or other is any other way, we really need the tenfold cover, I have little bit different view in this context, I would say tenfold cover is the maximum cover amount that one should have, then how to calculate minimum amount of cover that one requires the formula is simple, follow the steps that is narrated below.
Calculation of minimum amount of insurance cover
Step 1 : Calculate your regular monthly expenditure (say Rs.20,000)
Step 2 : Multiply it by 12 you will get yearly expenditure that you spends (20000*12=240000)
Step 3 : Get the Interest rate on monthly income Schemes of Govt. (say 8% )
Step 4 : Divide step 2 amount with step 3 rate and multiply by 100 (2,40,000/8*100= 30 Lakhs)
The resulting figure you get is the minimum amount of insurance cover you require
If you are having an cover which is less than minimum amount you are under secured and if you are having cover over the tenfold insurance income you are over secured.
A rational person will have a cover which is greater than the minimum amount subject to the limit of tenfold yearly income.
However this is not the only way of calculating the insurance cover there exists some scientific ways which takes in to account the inflation and saving rates but this calculation gives you the amount below which you should not have your cover and guides you in purchasing insurance plan, an ideal insurance plan is the one where cover amount increases with the period taking in to account the inflation rate.
so next time you go for purchasing the insurance plan consult your Chartered Accountant or Financial planner since insurance policies are issued for longer period.
- CA. Sameer Kashikar
