How much insurance cover do I need?

Question

I am 42 years old and my income is roughly Rs 10 lakh a year. How much insurance cover do I need? I have taken a housing loan of Rs 10 lakh. The current outstanding is Rs 9 lakh. Is there a way to calculate one’s insurance needs?

—D r M.M. Unni, Latur

Answer

Insurance needs are very customer-specific, simply because no two people are identical with exactly similar needs and resources. Some financial planners contend that insurance cover should be four times the annual income. But this is a very rudimentary approach. Broadly speaking, the insurance cover should be able to repay outstanding debts (home and car loans, etc) and also create a corpus that earns enough to replace the income of the insured person if he is no more. The best way to self-determine how much cover would adequately meet your requirements is to look at it from the vantage point of your age. Alternatively, you can break down insurance into need-based objectives. Take a look:

Age-Determined Insurance

Your financial position will change at every stage of life and there are policies designed to cover specific needs, be it your first job, getting married, taking a home loan or planning for retirement.

In Your 20s

If you have dependents, now is the time to buy life cover. Go for a term plan for the maximum duration. For instance, a 25-year old will pay an annual premium of Rs 2,820 for a Rs 10 lakh cover for a 30-year term.

In Your 30s

Add life cover for your spouse, consider a Ulip for financing your child’s studies.

In Your 40s

Take a term policy to cover big-ticket outstanding loans, such as a housing loan.This sums up Dr. Unni’s situation. So, if he does not already have an insurance policy to cover his home loan, he should take one right away.

In Your 50s

Your dependents would have by now left the roost. Continue with term insurance plan if you still have dependents.

Need-Based Insurance

As a first step to determining need-based policies, you need to broadly classify your insurance requirements into three heads:

• Funds needed to bring up dependents by replacing your income.
• Funds needed to retire outstanding debts (home loan, car loan and the like).
• Funds needed for one time needs—such as child’s marriage or higher studies.

Dr. Unni should have an insurance cover of about Rs 50 lakh. Assuming he does not have any other life insurance and significant financial assets, he should take a Rs 40 lakh term cover for 20 years. It would cost him about Rs 30,000 a year. He should take another Rs 10 lakh policy for 10 years to cover the home loan.

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