## How to calculate Insurance Requirement

There are lot of assumptions related to buying life insurance in India, because of underestimating the future non-life threats like job loss, accidents and also the life threats which will have a bad impact on your families future requirements in case of your untimely demise.

Today i will discuss about the calculation of insurance Amount one needs to protect his family even though he will not be there for them.

## How much should be the Insurance cover?

You will hear that it must be 6-7 times of Gross yearly income which is good enough estimate. but it does not consider other things like Debts or living style. It may be true for you but not for other. Some people may have simple lifestyle, whereas some other can have expensive lifestyle. So lets answer this question in another way.

This is pretty easy to answer, The life Insurance amount much be enough to –

• Pay off all the debts
• Should be able to provide monthly income which is good enough to cover family expenses
• Any emergency or unplanned needs for future.

## How to calculate the Sum Assured?

While deciding the  total sum assured, you need to consider all the factors that may affect to the financial life of your beneficiary when you will not be around. You should understand the expected cost of living for your family in your absence.

Some of the basic aspects that you should take into consideration in order to calculate the total sum assured are listed below:

1. Calculate the total one time expenses which can be paid in lump sum also, like, Loan, credit card bills etc.
2. Make a addition of all the assets like mutual funds, stocks, FD/RD, property etc. (Exclude those assets which your family is not willing to redeem or offset with the lump sum amount of liabilities)
3. Deduct the liabilities from the assets ( or assets from liabilities in case liabilities are higher)
4. Calculate the annual expenses of your family
5. Decide the number of years for which you want to provide insurance cover
6. Consider this amount for as a sum assured for your life insurance cover.

Let’s take an example.

Example :

Ajay is 30 yrs old and earns 40,000 per/month. He is married and has 2 kids. There monthly expenditure is 20,000 per month.

• His debts and future expenses.(total : 47 lacs)
• Home loan of 24 lacs (remaining)
• Car loan of 3 lacs.
• His children studies expenses. (20 lacs , in future)

His investments are (total 8 Lacs)

• 5,00,000 in Fixed Deposits
• 3,00,000 in Mutual funds

He has 47,00,000 worth of Debts and expenses in future and monthly expenses of 20,000 , considering inflation @5% , which will also increase every year. His Insurance money should be able to pay for both of these.

We have to answer that how much money will provide 20,000/month (post-tax) or 2,40,000/year.

Considering 15-20% tax, the family should get 3,00,000, so that after paying tax they are able to get 2,40,000 per year. So how much money will give them 3,00,000 per year.

Fixed Deposits rates are around 9-9.5% per year. Which means 3,00,000 X 100 / 9.5 = 32,00,000 (approx).

So if they have this much amount in Bank which pays interest of 9.5% yearly, they will receive around 3,00,000 per year as interest and after paying taxes, they will be left with 2,40,000, which can meet there monthly expenses.

Also the insurance amount should have 47 lacs extra, which will be used to pay there debt and future expenses.

So total = 32,00,000 + 47,00,000 = 77,00,000

As he has 8,00,000 worth of investments also, His Insurance needs comes down to 77,00,000 – 8,00,000 = 69,00,000 (let’s make it 70,00,000)

This is the minimum amount for the insurance needs.

It should also be considered that the expenses will rise and some emergency may also happen. So insurance can be increased by 10-15%. But for the moment we will not do it. Its in fact not necessary in this case because the money for future expenses can be invested and which will grow .

Tracing Back

So we arrive at the figure of 70,00,000 . Now lets go back again and see that in case there is sudden death of the family head (earning member), how this money helps the Family..

They receive 70,00,000, Out of which they pay 24,00,000 of home loan

Money left = 70,00,000 – 24,00,000 = 46,00,000

They put 32,00,000 in bank or Monthly income plans, which will provide them with monthly income of 20,000 per month (post-tax).

Money left = 46,00,000 – 32,00,000 = 14,00,000

Now this 14,00,000 can be invested in Debt or Mutual funds which will grow to become at least 20,00,000 in some years (considering its needs after 10 yrs at least.

At the end of 10 yrs, when family needs this 20 lacs for there children education, they can use it. And for any emergency needs they have another 8,00,000 in investments.

So in general All the requirements of Family is taken care of. If insurance amount is less than 70,00,000 they will have to compromise at one place or the other.

## Why it is necessary to have as life insurance cover?

Life insurance is an important instrument to make your dependents life secure, in case of your untimely demise.

Though there is nothing great in that, but most of the people miss on this part and according to studies, more than 80% of people in India are under insured, which means the amount there nominees will get will not be able to cover them against the financial crisis.

## How much will the Life Insurance cost him per year?

As I write this Article, I can see on https://www.click2insure.in/ that for a 30 yrs old non smoking male for 25 yrs of cover, the minimum premium per year for 70,00,000 Term Insurance is Rs.21,000 per year (taxes extra).

The premium is just 4.4% of this yearly income. Just imagine how cheap term insurance for total peace of mind for rest of the life.

### So whats the final formula?

Insurance cover = A + B + C – D

Where,

A is Money which can give you monthly income = Monthly expenses * 12 * 100/(interest rate which bank gives in a year , example 9.5%)

B = Future Debts or Expenses.

C = Some money for contingency or emergency.

D = Your investments or Assets (excluding HOME)

If you are under insured, please take extra life insurance and cover your family. You can also buy insurance under MWP act.

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Kumar
10 years ago

Dear Manish,

Im going through your article One by one to Understand Insurance better. On enquiring and reading I heard term Insurance is better. On seeing your Many article confused which One to read first. Can you help me in making things in order to read. And Need one more imp help from you.

Im 25 Unmarried getting an monthly income of 30K PM. I dont have any assests ( Only dad is having ) . Advice me for how much I need to take term Policy and in which Company please. Could see many Maths calculations. Worried because of this.

Chetan Ambi
10 years ago

Manish,

Wonderful article on calculating ones life insurance amount. Yes, its always wise enough to split our insurance amount between 2-3 insurers.

kishore
11 years ago

I am 33. I took out 2 LIC life insurance policies, in 2005 for 15 lakhs (18 years) with premium 73000 and in 2010 for 15 lakhs (25 years) with premium 91000. Am i paying too much and can I change my policy now?

11 years ago

In your formula for calculating the insurance requriement, the impact of inflation on monthly expenditure is not considered. In an example, if monthly expenses are Rs.25,000/- and interest rate 9.5%, the insurance requriement works out to about Rs.37.89 lacs (with a built in contingency of 20 %). The monthly interest on Rs.31.57 lacs (sum excluding contingency) is Rs.25,000/-; as this amount will increase over time due to inflation, the monthy requirement after 10 years will be almost Rs.50,000/ assuming 7 % rate of inflation. How to factor this in calculating the insurance requriement.

You may also like to add a few comments on people who do not require insurance (persons without dependants; working couples without children or independant children).

Sumit
12 years ago

Wow! what an article…..thnx for ur efforts…its really great..

jyoti
12 years ago

hi manish
i am grateful to u for your blog .i have certain questions regarding insurance cover which we need(my husband and myself)I want to share some details
1. we have a house loan whose outstanding amt is 2100000 at present .loan is for 25 years term.the loan amt is covered by insurance done by bank itself(sbi)

2.we have few policies of lic jeevan chhaya,jeevan saral,pension plus,wealth plus
premium for pension plus 32000pa,wealth plus rs 20000pa for three years and remaing two policies premium amt to45000

3 we have one icici prudential health plan (prm 4000) and one ulip pension plan (pr 10000 pa)

4 we have one daughter (5 yrs) .my mother in law is 75 yrs and dependent on us.

my husband salary is 8.5 lac pa.and our monthly exp are around 48000 incl home loan and car loan emi.how much should be our insurance cover.my husband age is 33 years

Dr Amit
12 years ago

any review of SBI lifs smart shield . i want to purchase it.

mehul pathak
13 years ago

Hi Manish Jee ,

First of all , I want to thank you and this website’s team for proving such an important and valuable guidance on financial planning.

I need help on insurance cover from your channel’s experts.Kindly consider my question through mail as I can’t be able for recording due to my office timings.

My annual Salary is Rs. 144000 /-
My monthly expenses are Rs .8000/-
I save around Rs. 48000 /- yearly
from my savings I can invest Rs. 10,000 on insurance cover yearly.

Now I have searched in some insurance companies’ web sites and in advertisements that the term insurance cover of Rs. 50-60 Lacs for 25-30 years term ,you can have by paying premium upto Rs. 10000 yearly.

In my case I am capable for paying Rs. 10000 yearly but will the insurance companies give me term insurance cover of Rs. 50 to 60 Lacs as my annual income is Rs 144000 /- ?

Can I ask for high insurance cover against my lower income from insurance companies ,as I am capable to pay their yearly premium amount, which comes under my yearly savings ?

Presently, I am single now.I have neither any insurance cover nor any investment for future and my current age is 26 yrs.

Thanks With Regards,

Mehul pathak,

New Delhi

13 years ago

Manish,
— You have missed to include corpus in Employee Provident Fund account in the calculation.. which will be one of the major contributor
— Most of the employer has Group Term insurance – A BIG corpus missed in the calculation
— The monthly expense will go to 40k in next 12-15yrs and corpus required MIP should be revised..

Sunit Kumar
13 years ago

Hi Manish

I am 30 years old and am currently happily unmarried :D. My Annual Income is roughly about 7.2 lacs pa. My total contribution towards PF( EPF + PPF) is 75k, which I wish to continue in my coming years too.

Recently I purchased a small flat from my saving + taking loan, with total outstanding loan on me being 15 lacs (for outstanding period of almost 20 years). I will be moving to my flat by February , 2011. My flat is covered under insurance for paying off my debt in case of my death.

My monthly take home salary is roughly 50k. My current monthly expenditure excluding the loan EMI but including the house rent is around 15k. I own a car( bought in 2009(, and monthly expenditure is around 5k on same, this is included in my total expenditure.

Once I move to my new flat, my rental expenditure around 6k will be saved and my expenditure on car is expected to be same as the distance from office to my new flat is same as current flat.

I have a term insurance from Bajaj Allianz for 15L/35years premium 7k approx, purchased last year. Currently while looking for covering myself to pay off flat debt, I found that the premium to my current insurance is too high, for that premium I can buy a new term insurance for 30 years for a very high coverage and am planning to switch to same

I also wish to invest in pension plans like NPS for retirment benefits.

My questions to you are

1. is my decision to switch my Insurance is wise enough
2. I am looking for higher coverage now, and as I see above, I notice you advising people to invest in more than 1 insurance plan, and all the time i see you mention LIC as one of them, though the premium in LIC is higher compared to any other insurance companies, is there any special reason for that ( as one of my friend commented “LIC is still the trusted one when it comes to payment after death” is this the reason for you also mentioning the same)

What should be the ideal insurance plan I should be looking for and what insurance plans would you suggest me.

Thanks and Regards
Sunit

Subhajit Khanbarman
13 years ago

Hi Manish,
Nice to see your posts. One of the Agent from Birla Sun Life Insu have suggested one endowment plan-> Bachat (Endowment) plan. Here they r telling minimum Bachat Addition rate is 5.5%+Loyalty addition =9.43%/year. The formula given below,
Bachat Addition = Sum of all MBP’s paid to date x Bachat Addition Rate
here, MBP=Monthly Base Premium and bachat Addition Rate is 5.5% this year.

Loyalty Addition = Sum of all Bachat Additions earned to date x
Sum of all Bachat Additions earned to date / (240 x MBP)

They have suggested to invest 30,000/year for 20 Years and the survival amount will be 11,46,604 if minimum bachat addition rate is 5.5%. According to them and the policy doc, this rate will be decleared by company every year and it should not be less than 5.5 %. It may increase every year.

Daman
13 years ago

Hi Manish,
It is a really useful article from you, which I found while searching on google.
Can you also suggest which is better plan for Term Insurance.
I have one from ICICI covering 25K for 30 years at Rs.4100/year, which I want to increase before next premium. I am not sure MYNC or LIC has better plan then this.

Thanks!

Daman
13 years ago

Hi Manish,
Sorry, its 25 Lacs. It is a term insurance. How does the insurance claim work for multiple policies, as you suggested?
Do you already know some plan from LIC which you would like to recommend?

Daman

Rajat Bansal
13 years ago

Hi manish.
I appreciate to open my eyes from the sweet but tarrable dream of Endownment and money back, whole life plans.
Could you insure me that how long i can take the benifits from TermInsurance..(Means……… The maximum age of taking termInsurence)
also tell me IS TERM INSUREANCE PROVIDE ACCIDENTAL DEATH BENIFIT????

Abhishek
13 years ago

Hi Manish,

Where have you used 5% inflation in your calculations ? I guess you have calculated 2,40,000 per year for 25 years which will increase per year by 5% but thats not part of the calculation .

Abhishek

Mukesh
14 years ago

Hi Dear,

I am 40 year old, having wife and 2 kids (12 yr and 7 yr).
My monthly take home is about 1L and avg monthly expenditure is about 50K. There is no liability for me at the moment as I have paid my home loan already.
In your opinion what should be my term insurance cover and more importantly from which company I can buy cheapest term insurance?

Regards
Mukesh

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vikalp
14 years ago

Yes sir,very bad part,you know ITS THAT PART OF LIFE!!!

So i got my mistake,now i m looking for a term policyy of 8o L,did some research on it.found LIC’S jeeven amulya to be good with yearly premioum of 29,200 for 35 years.

Now since i m not married,not planning for kids education and all now.(Saving money for marriage first 🙂 ).
But how to go about retirement,wld EPF+PPF work here ,so shouldi opt for pension plans etc by different banks and if then which one is gud one.

Thanks Manish for all your help,its a great initiative but going forward will bug you more about these things

Thanks again

Vikalp

vikalp
14 years ago

hi manish,
i needed your guidance regarding my insurance needs.I followed your calculations and what i calculated is below:

1.i want my family to have a monthly income of Rs 30,000 .Assuming tax to be 30% and return by bank to be 7%.This gives me an amount of
Anuual amt=360000*100/70=514285
corpus needed=514285*100/7=~74,00,000

i am not married and i am 29 years old,annual income of arnd 8 L.I see a exp of around 45 L or more ahead as in home loan and childeren education etc.It come to be around more than 1 crore.This is to much amount for me.I have investments of around 1 lakh now.
How should i go about my planning?
plz help
thanks
vikalp

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