Are you adequately insured?

>> Tuesday, December 2, 2008

In light of the recent terror attacks in Mumbai, I would like to reinforce our belief in `Adequate life insurance` cover. The word `Adequate` here is very important. Many believe that they are adequately insured if they have some money-back or endowment policies in their name and in the name of their children. They look at insurance as an investment product and expect that they should receive money from the insurance after certain years when they are alive. There are still many people who relate the term `Insurance` with `LIC`. They blindly go by their agent`s advice and take number of insurance policies without knowing whether they actually require the same or not.

In your day-to-day routine you often overlook some non-urgent but more-important things in life. It is far too late when you realize the importance of it. For example, if you are 35 years of age, you have a spouse who is a home-maker, two children studying in school and dependent parents who are retired. In this scenario you would give more priority to earning income and fulfilling the family`s present needs and wants. Some would be little smart and would also invest their savings for family`s future requirements. But a million dollar question is that, if something happens to you now, will your family members be able to live the life they are presently living? Will they be in a position to pay the bills, outstanding loans, future expenses of your parents and children? Will they be able to maintain their life style without any sympathy from relatives, neighbors or friends?

These are some of the thought provoking questions which needs to be answered. You may find these questions important if you want that in your absence your family members, who are dependent on you, should not suffer. Protecting your family against unforeseen eventuality may not be as urgent as going to work or enjoying time with family, but it is very important if you truly want your family to live the life which they desire even in your absence.

Having said this, let us understand the methodology used to arrive at the figure of `Adequate Life Insurance` cover. There is couple of complicated methods to ascertain your life insurance requirement, however I would like to discuss about a simple method by which you can calculate your `Adequate` amount of life insurance.

1. Calculate the amount of future family needs in Present Value: This is not as easy as it sounds. It depends on number of people financially dependent on you, their future needs and wants, your responsibility towards their future requirements, etc.

2. Calculate the amount of outstanding loans and liabilities: You need to sum all the present loans and liabilities which are outstanding. This amount helps you determine the amount of dues which your family will have to settle in case of your immediate demise. 

3. Calculate the Present Value of family member`s House-hold expenditure: This is the amount of house-hold expenditure excluding your personal expenditure. This amount would be required for family members throughout their life to at least maintain their current lifestyle.

4. Add other Contingent expenses: This may include funeral expenses or immediate contingency fund required immediately on your demise. 

5. The total of all the above points is the amount of `Adequate Life Insurance` required.

6. From the above total, existing life insurance and present assets (excluding residential property) should be deducted and you would arrive at the amount of under or over insurance. 

The above method helps you determine the amount of `Adequate Life Insurance` and compare it with your `Existing Life Insurance`. The deficit or surplus in insurance cover should be accordingly adjusted.

If you feel the above methodology is difficult, you should consult a professional financial planner who would assist you to determine the adequate amount of insurance cover required by you. It is important to get yourself adequately covered for all future uncertainties. 
Author: CA Priyesh Shah on MyIRIS
CA Priyesh Shah is a Chief Financial Planner and presently working with SRE Financial Planners.