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How Much Insurance Do You Need?

This is perhaps the most often asked, and misunderstood question. Insurance advisors will tell you that you need to be covered for a sum that looks big (like Rs. 30 lakhs or so) but that much money is not at all enough! In fact they sell you those amounts so that you can buy endowment plans and ULIPs which are not at all beneficial to you.

What you should do FIRST, is buy term plans to cover your insurance requirement. Buy only term plans where you don’t get your money back, since these are the cheapest. And buy them early in life – the later you wait, the higher the premiums are (but it’s never too late, unless you are 55+).

Let me take an example. If you earn Rs. 4 lakh a year, and you want your better half to live the same lifestyle for the next 30 years, you must also consider inflation and tax. 8% FD is subject to approx 25% tax overall, and inflation is around 6%.

If you were to die today, your wife will need Rs. 1.09 crores to survive 30 years from now without having to work. This is the amount you need to be insured for. (For an age of about 30, term insurance for
this amount costs about Rs. 35,000 per year)

If your wife is 30, you should assume life expectancy is 75 years. Add Rs.
50,000 per year as your investment towards FUTURE medical costs, and
then you need an insurance for: Rs. 1.91 crores. (For an age of about 30,
term insurance for this amount costs about Rs. 62,000 per year)

Note: This is a simplistic model, not considering things like one time payments needed for education, marriage and such. You will have to add those and recalculate manually.

Some of you have mentioned that for an income of Rs. 4 lakh a year, this is a HIGH amount. Rs. 35,000 a year is Rs. 3,000 per month, and you save tax too on this amount. But Rs. 62,000 is way too high, one can imagine. So Let’s consider this: For a 30 year old what can be the real cause of death? Disease is usually far away, and stress isn’t usually that developed for heart and brain ailments.

Accidents, however, are unpredictable and can happen in a vehicle, or even when walking! Such incidents are what you should insure against. Most insurers provide “double accident benefit”, meaning that if you should die in an accident, your next of kin will get DOUBLE the sum assured. So if you need an insurance of 1.1 crores, you can buy a 55 Lakh policy, with double accident coverage, which would cost around Rs. 21,000 per year. Much more affordable!

But also consider this: You will also be saving and investing money (that’s why you’re reading this blog). Therefore as your wealth grows, you don’t need SO much insurance, because your investments will cover a part of the money required. If you run the calculation every year, you may find that your investments cover a significant part of the money required, so why pay for extra insurance?

The way to do this is to buy multiple term plans. Instead of buying one term plan for Rs. 1.91 crores, buy TEN term plans for Rs. 19 lakhs each. Then, everytime you see that your insurance requirement has come down by Rs. 19 lakhs (because your investments are that much now), Throw out one policy.

Term policies are very easy to throw away; simply stop paying the premium! There is no legal requirement for you to to pay the premium every year, and companies give you upto two years of “grace” period, meaning if you don’t pay the premium for upto two years and then want to reinstate the policy (say you invested in a property that went bust) you can do it. (They may change the premium though, to your disadvantage)

Eventually, you may become so rich you don’t need (life) insurance at all. That’s fine; if you already own 1.91 crores and spend 4 lakhs a year, do you care about insurance? Probably not life insurance. Yes, you still have to insure your property, car, gold etc. against fire/theft/damage etc. but those are, by definition, term insurances and should be bought to cover those risks. The risk of losing your life should only be covered as much as your dependants need in order to live the rest of their lives in comfort.

If you have understood this, tell me how much insurance a 60 year old widower needs, if his children are all earning for themselves and he has no dependants?

Answer: ZERO.

How much insurance does a 1 year old child need? ZERO.

But if you have dependants, provide them a secure and comfortable life by insuring your life, for the amount that they need.

  • Sujit says:

    >Hi Deepak ,
    Thats a commendable exercise. I was just searching for answers to my current problem and, bang, I found your blog. I want to take a decision on an endowment policy that ended up with when I was finantially illiterate. Now that the truth has dawned, I want to switch over and have a term plan and start some investment with the sum(25kpa). I have already paid 3 yrs premiums, so if you care to comment, pray please tell me whether I am going on right track. I will be visiting your blog for your answer.
    Thanks
    Sujit

  • Deepak Shenoy says:

    >Sujit: Thanks for the compliments! Glad to be of help.

    Unfortunately in your case, a tough decision will have to be made. Endowments are extremely high load policies for early exit. For instance, LIC endowments have the following “surrender value” – “The guaranteed surrender value is 30% of the basic premiums paid excluding the first year’s premium. “

    Meaning, after three years, you will get back about 20% of what you have put in.

    But on the other hand, if you decide to stay with it, you will pay another X years of premium, which is going to give you a low return (in practice you make around 4-5%).

    I suggest you cut your losses and leave the endowments. Take a term plan, as you said, and invest the rest in tax saving investments and the like.

  • Sujit says:

    >Thanks Deepak,

    I have made up my mind, and will be cutting the losses.:).
    Between, I hope, my policy (JeevanShree II) will return me all the premiums paid, at the end of the complete term (25 yrs in my case 🙁 .)
    I will definitely keep interacting with you here.
    So, if you care, please tell me, which will be the best term plan for me , I will turn 30 next july and am a healthy non smoking individual.

    Thanks in advance.
    Your’s (indebted .)
    Sujit

  • Deepak Shenoy says:

    >Sujit: Try out the various term plans. Kotak has attractive plans for non smokers and for your age, IFFCO-TOKIO is also pretty inexpensive. Reliance Life is good and at the top end, LIC is a little expensive but they have the highest experience. LIC is hte only company with a term of 35 years (I think) so I would recommend you take a good look at that as well.

    Whatever you do, take a term plan without return of premium.

    Take care, and all the best!

  • Sujit says:

    >Thanks Deepak,

    I will report back once I have finalized my take. I hope few others will also benefit from out conversation.

    Regards
    Sujit

  • Sathya says:

    >Hi Deepak,

    Your blog is of great help, your inputs helps me make solid financial decisions for my family.

    I have a doubt w.r.t calculating the profit or loss if I surrender my 6 year old “LIC Money Back Policy” and divert further/subsequent investment to MF.

    The policy term is for 25 years, I pay every quarter close to Rs.7800/-, the sum assured in an eventuality is 6 Lakhs and I have accrued bonus close to 2 Lakhs so far. After every 5 years the survivor gets to receive 15% of the sum assured and I have already been provided one survivor benefit.

    After looking through your blog, felt like my money in LIC will not reap good benefits on long run. However, I want to be sure if I am doing it right. I am planning to surrender this policy, go for a term insurance and divert further/subsequent investment to an MF. As per the LIC agent, he says if I surrender the policy today I will be getting only Rs.60,000/-, whats your thought? drop the LIC or stay with LIC.

  • Deepak Shenoy says:

    >Sathya, thanks for the comments!

    Don’t surrender your policy, ask if you can make it “paid up”. That means they will not take any further premiums from you and you will have a lower sum assured. But your bonus will come back to you at the end of the term.

    Also, don’t ask your LIC agent – call up the LIC office and ask them because your agent may not be happy to make the policy paid up (he will lose his commissions).

  • Sathya says:

    >I was actually whirling the google to find an answer, according to LIC, a paid-up money back policy cannot participate in the yearly bonus declared by LIC! (http://www.insuremagic.com/Content/FAQs/Life/faqs.asp)

    You think its worth waiting for 2 Lakhs and receive it by 2026 (term end) which I am not sure will earn interest OR might as well surrender it for 60K?

    Please correct me if I am missing the bigger picture you are looking at.

  • Alien says:

    >Hi…

    I was trying to arrive at the figure of 1.09 crores that you calculated an d it seems I am doing something wrong…

    This is the way i was doing it… for a 30 year period assuming inflation at the rate of 6%, Rs 1 today becomes equivalent to Rs 5.74 (compounding inflation.. I assume thats the right thing to do?)So Rs 4 lakhs is actually equivalent to Rs 22,97,396.46.

    Assuming one was to die today, I would need to put an amount in an FD that would earn me the above amount in interest in the 30th year . I am assuming the interest is taken out leaving the capital intact.

    At 8%, thus I would need an amount of Rs 2,87,17,455.86 in an FD..

    I am not sure how one arrives at the 1.09 crore??

    One thought is maybe since cost of living is only 4 lakh rupees, then the rest 18 lakhs can be reinvested in an FD and so on and that thus reduces the capital amount required…

    Can you point out if there is anything that I am doing wrong here??

  • Deepak Shenoy says:

    >Alien: Actually you need to assume that if you die your family needs to survive those 30 years first!

    From my calculations, if you want to provide for your family for 30 years, at 8% post tax rate, and spending 400,000 per year today + 6% inflation, you need 86 lakhs today.

    Meaning – 86 lakhs will give you 8% yield (nearly 7 lakhs) of which your family will spend 4, and the remaining 3 is reinvested. Next year they will spend 4.24 lakhs due to inflation but return is 8% of (86+3) lakhs, again the extra sum is reinvested and so on for thirty years. After 30 years the corpus becomes zero.

  • Raj says:

    >Hey Deepak,

    great piece and just in time, really. I was talking to this LIC Agent the other day and refused the Moneyplus and the other assorted bloodsuckers he was throwing at me. I’m a 26 yr old, smoking male with no one who is dependent on me (that’s also the way I want it to REMAIN, but who knows…). My mother receives 2 pensions and has a small business of her own and a lot of other investments which take care of the needs of my 2 siblings. I was thinking about pure-risk insurance of Rs. 1 crore, but am unsure what period to opt for. The higher the term, the higher the premia. Any suggestions?

    Cheers,
    Raj.

  • Deepak Shenoy says:

    >Raj: Thanks mate. Glad to be of help.

    Now, considering you are a smoker, you need insurance (grin). Jokes apart, I was a smoker too – till a couple years ago – and it’s bloody hard to kick the habit. so yeah, quit that first – you won’t need as much insurance.

    And 1 crore is good, but here’s the funda: If you keep saving, you will have enough money over the years. Lets say you take four term policies – 25 lakhs each, for 15, 20, 25 and 30 years respectively. Thats assuming your savings will add up to 25 lakhs in 15 years, and then keep doubling every five years after that (that’s an average return of 15% a year).

    Take pure risk insurance without money back. That way if you reach 25 lakhs earlier (say a bonus or something) and don’t need the first policy you can just stop pying the premiums.

  • Raj says:

    >Hi Deepak,

    I might sound braindead but, humour me – my idea of Life Insurance is that,

    1) After my passing, the people I love should not miss me financially.

    2) For investment, there are other vehicles which are faster and more efficient.

    3) The fact that I’m now relatively young and have enough time to make my pile helps me invest in instruments that might be considered risky by those older than me.

    Now, vis-à-vis your reply to my question,

    1) What does my saving 25 lacs in 15 years have to do with the insurance term that I shall be choosing now?

    2) What does doubling that every 5 yrs have to do with the term?

    I’m convinced that the way to go is ‘pure-risk, non-endowment, no bonus, etc’. What I’m not sure about is:

    1) Should I split the 1 cr into 4 policies with different terms / go for a single 1 cr policy?

    2) Which is the best term in both cases (full/split), because the amount of premium is directly proportional to the term?

    Many thanks!

  • Deepak Shenoy says:

    >Raj, here’s my replies:

    1) Your insurance must be enough to keep your family financially covered. If you have a requirement for 1 crore today, that’s because you have very little savings, and the family needs a crore that generates money at 8% a year to meet lifestyle (and beat inflation) Actually it needs a little more than a crore at your age, but let’s leave that aside – a corpus is a corpus.

    Now if you had 25 lakhs in the bank, would it be necessary to have a crore? Nope- you need just 75 lakhs, right? In the coming years, your savings will add up and your net worth will increase. Then, a crore may not be required – in which case you can get rid of a few policies (if you’ve mapped your insurance right)

    If you had a crore today would you need insurance? no. Perhaps that figure will become 2 crores tomorrow (either your expenses increase or inflation goes through the roof) or it may actually come down because what you pay for rent may no longer be required if you buy a house (and cover the loan with another term insurance)

    Splitting insurance gives you the option of shutting down just a part of the insurance, where hte annual premium is locked in right now at a younger age. I would suggest four policies or, to make it simple, two of 50 lakhs each. Term wise – get one for 30 years and another for 20.

    At this age, the highest risk is of an accident (versus heart attacks or such). Getting double or triple cover for accidents is cheap – in some cases just 25% of the term premium (I pay totally 13000 for double accident insurance for a 30 lakh term policy – giving me 60 lakhs cover against accidents, for just 3000 extra. And I’m older than you)

  • Anonymous says:

    >Hi Deepak,
    I am trying to understand the Term Plan that you have mentioned. I think I am being a bit dense, but please bear with me..
    You have said that if I survive beyond the term of the policy, I will not get any money back. So say I have put in Rs. 2044/year (For 5 lakh sum assured, 25 year term) and assuming I live beyond these 25 years and I have put in Rs. 51100, do you mean to say that I will not get even this Rs. 51100 back?? 😮 Or does it mean that I will only get Rs. 51100 back and nothing more than that? I hope the latter is true!!

  • Deepak Shenoy says:

    >Anonymous: You get ZERO money back. Let me ask you this: YOu insure your car every year. If nothing happens to your car, do you get your money back?

    Life insurance is similar – it’swhat you pay to protect your family in case anything happens to you. No money back – it’s an expense.

    You can get money back if you want but the premiums are much higher. That’s no point, because they use part of your premium to fund the cover, and INVEST the rest so that they can get just about enough to return you your premium. This is typically 8% a year or so.

    instead, what I suggest is to take the “rest” (the differnce between teh “money back” and the “no mony back” premiums) and buy a mutual fund every year – you’ll make higher returns and get back your premiums faster.

  • Anand says:

    >What are the dis/advantages of single premium payment in term insurance. To me it seems to give a lot of peace of mind. e.g.
    I am 36 and if I pay 3 lakhs one time, I get covered for next 25 years for a sum assured of 50 lakhs (LIC)..Any comments?

    Anand

  • Deepak Shenoy says:

    >Sounds good Anand, but:

    1) If you don’t need the 50 lakh cover (say you become really rich) then the upfront money is gone.
    2) You don’t get the advantage of spreading the premium cost over years and using inflation. If your annual premium is say 20K per year for the same contract, money the 20K paid in the 16th years is equivalent to 8K today (6% inflation)

    Similarly, 50 lakhs after 25 years is about 12.5 lakhs of today’s money. You’re going to pay 3 lakhs today to get equivalent cover of 12.5 lakhs after 25 years.

    May be better to put 2.8 lakhs in an FD. Get about 8% on it every year and use that to pay off your annual premium. That way if you survive the term, you’ll still have 2.8 lakhs (the amount in the FD) left over! (of course it will only be worth 70K of today’s money then)

  • Abhijit says:

    >Deepak the information provided by u is very useful.

    I am 24 & my annual income is 3.3 lakhs.
    I want to buy a term plan but I have a few queries?
    1. What risk cover shud I go for? I am thinking of 20lakh? Is it enough?

    2. What is the term that I shud select? Most people suggest to go for the maximum term.

    3. Shud I add riders like accident rider & critical illness rider to the base term policy?

    Plz provide ur suggestions. Thanks.
    Abhijit.

  • Deepak Shenoy says:

    >abhijit: I’ve answered in a separate post.

  • r says:

    >Hi Deepak,

    I read your comment and need ur advise regarding my insurance query.
    I am 28 and earn 20K p.m. I have my wife and one kid. I have taken one endowment plan (SBI Sudarshan-6400 yrly premium (SA-1L)) and one ULIP Plan(ICICI Prulife time- 20000/- yrly premium).Other investments are in MF & NSC.
    I am planning to take another life insurance plan. Please suggest me which plan is good and plese explain the cost structure of the life insurance plan.

    Regards
    Rajeev

  • Vishnu says:

    >Hi Deepak,

    I have been reading your blogs for quite some time, and would be happy to rate this as one of the top resources for investment related articles.

    There are plenty of sites like Rediff, Personalfn posting many investment related articles, some of them are quality ones.

    But, there is one parameter which makes this blog way ahead of all those.

    That is the Post-Interaction with the readers by replies.

    Some times your replies to readers’ comments are more exhaustive than the actual post 😉

    The quality of the posts are remarkable and the way of presenting too is way too good.

    Hats off!

    Thanks for giving such quality resources for Netizens!!!

  • Vishnu says:

    >Hi Deepak,

    I would like you to help me in picking a right Insurance Plan / MF Portfolio for myself.

    I am 24, single, non smoking male. I earn 30k / month. My parents would be working for 1.5 more years and would be my dependants from then.

    I need to save 3 lacs (infation included) in next 2 years for my sister’s marraige. And another 2 lacs in 3 years for mine 🙂

    I have a ULIP (Bajaj UnitGain) with coverage of 10 lac. I have paid premiums (10k) for 2 years so far. I feel this as the biggest mistake I have done in my investments. (The allocation charge was as high as 70% for 1st year and the allocation charge is 2% from 3rd year.) Is it wise to continue with this plan?

    I want to take a Term Plan. I have picked Max Newyork Level Term Plan for 36 Yrs / 30 Lac for Annual Premium of 7800. Is this a right pick?

    I have 80K in Mutual Funds / Stocks. I can save 10K / month in addition to tax savings of 6.5k / month.

    Please look at my current tax savings portfolio (current value).

    HDFC LT Advantage – 32K (42K)
    ICICI Tax Plan – 14K (18K)
    Franklin TaxShield – 8K (10.5K)
    Principal Personal Tax Saver – 1K
    FD – 10K

    I would like to get my portfolio to be finetuned before investing further.

    Thanks in advance Deepak.

  • ganesh prasad says:

    >Hi Deepak,
    Ur feedbacks are superb. I need a help from u friend. I have a LIC Jeevan Anand endowment plan for which the sum assured is 2.3 lpa and whose annual premium is 11992 pa for a 20 year term. I have paid prem for 3 years now. I have a term plan which covers 15 laks(for normal death) and 25 laks (accident) with a premium of 6.7k pa. I have a reliance superinvest assure plan for which i pay 5k every year. Reliance health policy which covers 3lak for my family n 3lak for my parents for which i pay 9k pa. I have 3 MF Sips. 1 non tax HDFC Growth 1k pm, 2 tax savin MFs SBI Magnum tax gain 1k pm n Sundaram Tax saver 1k pm. My question is i want to surrender my LIC policy and re invest somewhere else. so pls tell me what can i do with the 12 k every year that i wud have paid to LIC.
    Thanks
    Ganesh

  • Anonymous says:

    >Hi deepak
    I am 35…and make approx 25lacs per annum
    would want to take care financially of four members of my family individually to the tune of 1cr , 1cr , 50 lacs and 50 lacs respectively.
    Of course term insurance will be the best.
    Should I go with one company or multiple . I will invest in high risk medium as well and hope to build a good portfolio. So would you advise me to break 1 cr policies into multipple amounts and years as well..
    thanks
    shaurya

  • Anonymous says:

    >Hi..I’m looking for a Insurance policy which will give me a money back garantee of say 1 crore when i retire…can any one please help me on this

  • Anonymous says:

    >Hi Deepak, It is nice to read Capital Mind, after Value Research, in educating the public on the realities of INSURANCE. Unfortunately it is IRDA who should take up this role and take all the Insurance companies under its charge, instead of allowing them to garner innocent people's savings into high cost endowment or ULIPs.

    Foreigner market Viagra through email, Indian Government Cigarattes, liquor and Insurance lawfully to make money for themselves.Ultimately it is the poor citizen who gets cheated through the trained advisors. V L NARAYAN FROM CHENNAI veeyelyen@gmail.com

  • srinivas says:

    >Hi Deepak,

    I was just browsing about the LIC insurance plans I came across ur blog…..

    I am 32 now and my wife 25 i am planning to take a jeevan sathi plan for 30 years with sum assured 12 lacs or 15 lacs… permium comes to be 54000/annum(12 lacs sum assure+ DAB(double accidental benifit i.e 24 lacs) ) and premium 61000 for 15 lacs SA+ accidental benifit ..Is it the best plan which which covers both of us… do i need to consider any other plan like jeevan anand or something else ….please suggest…

  • vinit says:

    u have suggested to take policy without return of premium. why? bcoz some company are giving sum of premium back after policy maturity.