The right way to calculate your life insurance needs

Experts always recommend that the adequate amount of life insurance should be enough to protect in case of death of the bread winner. But, most of the people find it difficult and are confused about how to calculate the exact life insurance one needs to be covered with. Life Insurance agents may give you various reasons that are sometime not so convincing in order to make you buy insurance plans. They normally always advise you to buy insurance products with an investment component. This article will tell you how to calculate your life insurance needs correctly. Let us now understand how life insurance needs are calculated. There are two most commonly used methods to calculate life insurance needs. The First one (which is advocated by insurance agents) is human life value method. The other (which is correct method in my opinion) is to calculate on a need based method. The value of human life is calculated on the basis of income of the person to be insured till his/her retirement age. As against the human value method, the need based insurance value is calculated on the basis of day to day family expenses till the life expectancy of the youngest person in the family. One should apply need-based theory instead of going for human life value while calculating the exact need of life cover. It is also important to buy life insurance only if one has dependent/s who are financially dependent on his/her income. If you are single/unmarried with no dependents then there is no need to buy any life insurance cover. Many unsuspecting people are made to buy life insurance policy for their wife even when she is a pure home maker. Likewise, people are induced to buy child plans with the trick of emotional blackmailing for their childrens future without understanding the cost involved in such insurance plans. So neither, the buying of insurance for pure home maker or accumulating corpus for child is advisable. Your life insurance need will come down if your spouse is also working or to the extent of assets already owned by you. Any existing or future financial liability needs to be taken into account while arriving at the amount of life insurance you need. The liability would include loans or any value of expenses which one will have to incur in future like education and marriage of children. Let us take a live example to understand how to calculate life insurance need with the help of an excel application. Mr. Ronak aged 32 years working in a software company draws a yearly salary of Rs. 6 lakhs. He lives in Mumbai with his wife aged 30 years and 2 daughters aged 4 years and 1 year. They live in their own house which they bought last year for total value of Rs. 30 lakhs. They have taken a home loan of Rs. 20 lakhs and are paying home loan EMI of Rs. 25,000 every month. The outstanding loan balance currently is Rs. 19 lakhs. He has Rs. 3 lakhs in EPF account, Rs. 2 lakhs Mutual Fund Investment, Rs. 1 lakh FD and Rs. 50,000 in savings bank account. The total investment assets are Rs. 6.50 lakhs. His monthly house hold expenses including conveyance, education, life style is Rs. 18,000. He has two endowment plans of sum assured of Rs. 1lakh each and is paying premium of Rs. 10, 200 yearly. He has some future liability in the form of Rs. 5 lakhs each for higher education of both the daughters and Rs. 2 lakhs each for marriage. He is covered under group health insurance provided by his employer for 3 lakhs under family floater. Now Mr. Ronak wants to calculate his life insurance need with the help of excel.

So he opened excel, selected formulas then insert function and clicked at PV i.e. present value. Present value function will give you a present value of all the future outflow for his house hold expenses if anything happens to him today. Let us calculate and understand the same in detail. Check out how the calculation was done on the next page 1) Rate Rate is inflation adjusted return assuming 9% investment return and 8% as inflation. 2) Nper Number of years till life expectancy of the spouse i.e. assumed at 80 years. 3) PMT Present yearly expenses of the family. Taken 80% of the total expenses assuming expenses will come down to the extent if bread winner is no more. PV- Calculating based on points 1 -3, Rs. 68,84,382 is the family need today. But, this is not the final result which we are looking for. We have to add loan liability and future goals. Also have to deduct present assets already generated and existing life insurance cover. Self occupied home and personal jewellery will not be the part of investment assets. The final calculation will be as under: PV of House hold expenses today Add: 1) Home Loan Liability 2) Education Goal 3) Marriage Goal Total Less: 1) Investment Assets 2) Life Insurance Cover 6,50,000 2,00,000 8,50,000 68,84,382 19,00,000 10,00,000 4,00,000 1,01,84,382

Actual Life Insurance required

93,34,382

Ronak requires life insurance cover of Rs. 93 lakhs. These are very easy steps to calculate the life insurance need with the help of excels but before that you have to understand the basic things. Now, You can also calculate your life insurance need easily as shown above. You should also note that if your spouse is earning then your life insurance need will come down to the extent of spouses income. The same way you have to find out the present value of future income of your spouse and required to be deducted at the end. Life insurance proposal is subject to both financial underwriting and medical underwriting. So it is always advisable to disclose all the material facts correctly as asked in the proposal form and undergo medical tests as required.