How much Life Insurance you need?

Have you ever calculated how much Life Insurance you need? I know lot of us never thought about this. Even though you currently have Life Insurance of XYZ company, but you never calculated whether it is enough or not? It is common practice in India to approach Insurance Agent without validating his qualification and authenticity. This makes him to force on you his selected product and he may never calculate “Human Life Value”. He may mix up your Insurance need with your investments need and will show you some illustrations which may be rosy in today’s term but what about future? Basic thing you must understand is, never mix your Insurance with Investment. So how we have to calculate “Human Life Value”? I will show with simple illustration.

Human Life Value in simple term you can define as “your future obligations towards your dependent which you need to make it to current value” for example Mr.X’s age is 30 yrs and his wife Mrs.X’s is 25 yrs and her life expectancy is around 70 years. I will try to illustrate with simple 3 common expenses of his life span.

1) Mr.X’s Household expenses in today’s term-25,000 PM (Excluding Mr.X’s personal expenses and his Tax Liability)

2)  Mr.X have Home Loan of about Rs.50,00,000 (Current Value)

3) Both have a child whose age is around 5 yrs and they need around Rs.15,00,000 in current terms for their child’s future education and marriage expenses

Then in above case we need to calculate each value in today’s term till the life expectancy of Mrs.X’s life span (It is assumed that Mrs.X is financially dependent on Mr.X for her whole life).

Then the above-mentioned 3 expenses should be calculated to find Human Life Value as below.

1) They need around Rs.91,00,000 aprox to sustain household expenses till Mrs.X’s life span considering inflation as 6% and return on investment around 8%. Means, with that Rs.91,00,000 she can lead her life till 70 yrs of her age with expenses being Rs.25,000 PM which is going to increase 6% (Inflation) for each year . She needs to invest Rs.91,00,000 where  she will generate around 8%

2) In the event of his sudden death, then the existing Home Loan need to be payable from the insurance amount. Hence, we need to consider that value to in calculating his human life value.

3)  Child’s expenses also take in today’s value. Hence, we need to consider that too for considering Human Life Value

In all, after adding above three values his requirement of cash in the event of his untimely death towards his family is around Rs.1,56,00,000. Hence he need around Rs.156,00,000 Insurance Cover for his Life. Which again need to be increased in line with Inflation on yearly basis or at least either for after each 3 or 5 yrs.

Now deciding factor is, which Plan will cover this much Life Risk for you. Endowment Plans (You need to pay high premium to cover this much Life Risk with return being low), ULIPs (Expensive in terms of cost and Premium) and Term Plans (Pure Life Risk Cover Plans which are nowadays available in very competitive price).

Decide and cover your life risk, which is precious when you think about your dependents. Hope now you understood the value of “Insurance” and “Human Life Value”.

18 Comments

  1. can you please tell me the difference between an ADO and an insurance agent??

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  2. satish i whole life ltd(5) plan from lic is 100%best also bet term plan

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    • Deepak-May I know how much it satisfy the term plan benefit? Also can you elaborate how much % of portfolio one should invest in this 100% best plan?

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      • i think 10-15 lac sa policy is sufficient premium 50-65k pa for 15 pa….rest money invest in any diversify mutual fund thru sip….high recover….high return………also life long life cover…….term plan available max term for 35 yy

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        • Deepak-May I know how you arrived at that Rs.10-15 lac SA? But do you think life risk is necessary till the life long or till the working period of one’s life?

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          • everybody want insurance till live ……kids insurance parents…..parents insurance younger son…….its cyclic and time to time changes shoulders as responsibility change, 10-15 lac sa why ? i go wd suggested plans death value increasing 1-1.5 lac respectively p.a..so any buddy age of 25 buy same for 10-15 lac after 10 yy @ his/her golden age insurance increases 20-25 lac what i feel right some where and also increasing onward same p.a. sir i think u must be see aamirkhans sataya mev jayate senior citizen episode then u understand better why life long insurance needed(here i have 100% emotionally suggesting, its fact no buddy ruled out)

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            • Deepak-For your information insurance is must till human working age. When you say the “Human Life Value” to arrive at the life insurance need, you calculate it based on his earning capacity, future dependents goals and his liabilities. So ideal cover should till his retirement. That is why all term insurance products end almost around 65 years. Also the way you are recommended to have around 10-15 loss of life risk is short sighted. What if the client has loan liabilities of around Rs.50, 00,000 home loan? In this case you recommend him the term plan of 10-15 lacs only?
              Now related to Amir Khan’s episode, suppose a person is around 80 years of age and do you think how many in his family financially dependent on him? I don’t think none will depend on the 80 years old age guy financially. So if no one is financially dependent then life insurance is required?

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              • sir now time to think beyond loan….and human value!!!!!!!!! can u explain what is human value of unearned or retired person??

                u said “Now related to Amir Khan’s episode, suppose a person is around 80 years of age and do you think how many in his family financially dependent on him? your answer is yes then not insurance required? so again recommend u must see twice Amir khan’s episode.

                u said ”I don’t think none will depend on the 80 years old age guy financially. So if no one is financially dependent then life insurance is required”, right said !!!!!! but he himself depended on others….again see episode!!!! no buddy care without
                any benefit u and me too sir

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                • Deepak-Human life value stands for replace of all future income, his financial responsibilities and liabilities that is lost when an employed person dies and making that to present value to arrive at a figure which is the actual insurance need. So how you calculate the human life value of unearned or retired people will be defined by above lines itself. To be precise, suppose a person puts a proposal to the life insurance company declaring that he is not earning a rupee and his yearly income is zero. Then let us see how many insurance companies will come forward to issue the life insurance to such person 🙂
                  So you mean to say that you will care your parents only if you have something financial benefit from them? Also depending financially on others in old age is itself the result of improper financial planning.

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                  • sir need of insurance depends on three parameters replacement of expenses/income/ human-life value.

                    sir i m fact finder and my legs always stuck with earth (Fevicol)
                    if i assume my hlv 5 cr.not possible to pay premium or do investment to achieve hlv due to current liabilities and its common for all respectively once hlv.

                    three time yes..yes…yes….no buddy care parents without something financial benefit from them.

                    other wise why require financial plan,see Basu Nivesh Learn….invest….succeed!!!!!!!!

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                    • Deepak-Insurance depends on the human life value which includes both replacement expenses and income. So in your case HLV is Rs.5 Cr and unable to pay the term insurance premium which will be around Rs.20,000 but able to invest in low yielding and low insurance covering product of around Rs.75,000 to Rs.80,000 !!! Then best of luck 🙂
                      Wow !!! Good sharing Deepak. Buddy or nobody?? This itself shows the importance of retirement planning and proper insurance till one’s working age. Hope your parents are listening your words 🙂 Best of luck to you and your parents 🙂

  3. my doubt is ….is it possible to achieve this with Term plans?

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    • Satish-If you calculate your human value correctly yourself or with the help of an expert then you will come to know the insurance cover you need. Based on this you need to buy. If you covered your life risk with proper insurance coverage and if something happens to you then this insurance will definitely will achieve the rest of your dependent financial life.

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  4. ok..thanks! can you suggest me a plan to achieve this….u may send me a mail if you dont want to disclose here…

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    • Satish-Nothing like, You may google it for online term plan and find a plenty of options. Select based on your comfort with the company and the pricing.

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  5. you have given good illustration but didn’t suggest the best plans to achieve this !!

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    • Satish-My goal is to spread knowledge on this platform but not suggest a product. Hence I kept that away from this. Best plan I can suggest you is term plans.

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