Insurance Planning

We always want the best for our family and life is full of uncertainties. There is an ‘IF’ in ‘LIFE’. Hence planning for the contingencies and taking concrete steps to secure our family’s future is of utmost importance. For there is no way to ascertain as to when one might lose the ability to provide for them due to disability or the sudden loss of life.

Insurance Planning is one of the most important pillars of Financial Planning. This is because Life Insurance is the only tool which can fulfill financial commitments in case of untimely death of the bread earner of the family. Thus having an appropriate life cover is important.

Why Insurance Planning is required?

Increasing liabilities:

People today prefer to take loans to fulfill their needs, instead of waiting to save for the future. Hence, in your absence, your family needs to take care of this loan

Nuclear family structure:

Earlier, people could depend on their extended joint family system to take care of their near and dear ones in case of their absence. However, the share of families with more than 5 members has come down from 64% in 1990 to 56% in 2005 and is expected to decrease further.

Increasing lifestyle diseases:

People these days are prone to many diseases as a result of which the longevity of life is also reduced. Thus it gets important to take an appropriate risk cover and give your family a financially secure future.

Loans & Liabilities:

Insurance policy also helps to cover up one's loans and liabilities. The house one buys for our shelter, we would never want to let it go. Thus an insurance policy can help one to cover the loan liabilities.

How much Life Cover should one take?

Calculating how much life insurance you need is one of the most important financial decisions you will ever make. It should never be an isolated decision depending only on how much of a premium you can afford.

Life Insurance needs can be calculated in the following methods:

Income Replacement Value (Rule of Thumb)

This is one of the basic methods of insurance calculation and is based on your current annual income.

Insurance needs = annual income * number of years left for retirement.

Let's say your annual income is Rs 5,00,000. And you are 45 years old with 15 more years for retirement.

In this case your insurance cover equals Rs 5,00,000 * 15 = Rs 75,00,000.

Another way in which income replacement works is to multiply the annual income by 10 (also known as Income Replacement Multiplier).

When to start for your Insurance Planning?

Look at the table below:

It shows the premium amounts that an individual at different ages would pay for a risk cover of Rs.1 Crore for 20 years.

Age
    

Annual Premium

25
    

9700

30
    

11050

35
    

14750

40
    

22025

45
    

34375

50
    

56625

There is a difference in the premium amount if you take insurance at later ages. This is because the probability of diseases is larger at high ages and mortality is high.