Congratulations for making up your mind to take a risk cover for your life. Life Insurance is one of the most important things associated with a person’s financial planning and often one of the most ignored aspects. An essential step of taking a life insuranceis arriving at an appropriate level of cover (called as Sum Assured) and the objective of this article is to assist you in calculating it.
How Much Insurance Should you Take ?
The main motive of an insurance policy is to serve the dependents once the insured person dies. The more the insurance policy pays the dependents, the better would be their standard of living and their ability to meet their liabilities. This amount is determined upfront at the time of entering into an insurance contract while taking the insurance policy. In order to arrive at the sum
assured you need to perform a few computations to understand how much would be the expected costs of living for your dependents in case the unfortunate event happens. Most of the people either take too much or too little insurance cover. The basic thumb rule to arrive at the sum assured value is :
1. Compute The Monetary Liabilities
Sit down with a pen or paper (modern generation can use a PC / Laptop) and start jotting down list of liabilities which your family would need to pay every month. An easy way to start can be looking at your bank statement for past couple of months / one year and see the debits in your bank account. It would give an indication of the recurring monthly, quarterly or yearly expenses. Such expenses can be (just as an illustration):
- School fees;
- Utility bills such as gas, electricity, water, telecommunication, etc.
- Monthly mortgage / EMI payments for your house, vehicles, student loans, personal loans, etc.
- Insurance premiums for the life cover of your spouse / family members;
- Medical Insurance premiums for your family;
- Monthly grocery bills, and so on.
2. Value of your Assets
Arrive at the value of your assets at the time of taking the life cover. There are two kinds of assets :
a. Which can not be sold or dead assets. An example can be the home in which you may be living. Read our article Your House – A drain on your Finances. Other examples can be jewellery of your wife.
b. Assets which your family can liquidate for meeting their expenses. A few examples of such assets can be stocks, mutual funds, fixed deposits, balance in PPF / Provident Fund, etc.
3. Arrive at Required Liquid Funds Needed
In this step :
a. Obtain the amount derived from your calculations in step 1 as the starting point. For the purpose of this article, lets assume that your average yearly outgoings is Rs. 600,000. You may want to add another 10-20% to this amount to meet any additional costs.
b. Take Long term interest rates prevailing in the country. In India this is generally 8% p.a.
c. Using the interest rates, arrive at a fund value which would be required to provide a yearly cash flow mentioned in step a. above. The simple formula can be:
Average Yearly Cashflow Needed X 100
Interest Rate
In our example, this would 600,000/8 x 100 = Rs. 75,00,000. The idea behind this figure is to allow your family to put this amount on interest to get a regular source of monthly income.
4. Arrive at the Sum Assured
Once you have arrived at the liquid funds needed to sustain the cost of living of your family from Step 3 above, you can easily arrive at the sum assured needed. In our example, either you can have your sum assured as Rs. 75,00,000 or you an add on an extra amount to allow your family to pay off any lumpsom liability such as a housing loan / mortgage or to create an extra buffer.
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Very informative and definitely help in calculating sum assured.
Thanks Renukadas.
sir,
i am an nri – i had taken a 50 lakhs lic policy named jeevan anand in 2006 and had been regular on my payments so far..i pay the premium every quarterly.
i am facing some financial issue now..and want to delay my lic premium payments for this year.
would like to know on what is the worst that could happen if i am delayed in making premium payments. or is there any other option for asking for an extension..
Sarvate,
What was the objective behind taking this policy ? If it was investment, I would suggest to revisit you decision to even continue contributing into this policy. Jeevan Anand will give you no more than 7% return. You would be better of investing in NRE FDs which will give you over 8.5% return.
If you took for insurance objective, again it is not the right policy as you get barely 50 lacs sum assured for over 2-3 lacs annual premium.
Hi BFA, Thanks for your informative articles.
My calculation of sum assured matched yours, at 75,00,000. But I have taken a LIC Jeevan Shree Policy, which comes with 5 Lac as sum assured, with 25000+ as yearly premium and 25 year tenure. The insurance agent promised me that the maturity amount would be 20 – 25 Lacs at the end of the policy, including bonus and other returns.. Is that true?
I am confused between 5 lac sum assured and the promised 20 – 25 lac maturity amount.. What is true?
If 75 lac is the sum assured what I should have, as per the calculations. What policy should I opt for and how much will be annual premium.
Thanks in anticipation
I agree. This is really confusing. Can you ask LIC directly to check what is policy offering you ? I never trust the agents. LIC policies won’t give you more than 7% return and this one seems to be giving around 10% which seriously sounds fishy to me.
You need a Term Insurance which you can obtain from any of the insurance companies. The best in the market are HDFC Click to Protect, Bajaj Allianz. LIC is good as well but expensive. The premium depends upon your age.
sir,
i have taken a jeevan anand policy from LIC for 50 lakhs in 2006 ( need to pay the premium for 35 yrs) and had been paying a yearly permium of 1.33 lakhs . the policy currently shows..
Vested Bonus 1590000.00
what does this mean..is this the amount i will get if i cancel the policy now or if i want to take a loan,is this the amount i am eligible for?
please clarify
what is your view on this bonus..is the ROI good here for what i am paying..
am 31 yrs old now..
please advise
Hi Insured,
The ROI on any LIC product is generally less than 7% or at max 8%. This in my opinion is a sub-standard return for a 35 year investment. I will not be able to confirm the surrender value of your policy and would suggest you to confirm it with LIC.
I feel Banyan Financial Advisors is using this forum as maligning the image of people’s darling LIC of India. He is merely confusing the people here by baseless presumptions about LIC of India. He appears to be a dedicated agent of the Private profiteer insurance companies looting the hard earned money of Indian people.
LIC of India is working really for social security of people of the nation, while private companies emphasize over the ULIP schemes. ULIP schemes have no defined returns while conventional insurance policies give bonus, in which no private company can compete with LIC of India.
May be tsunami in South India or Earthquake in Gujarat or calamity at Uttarakhand, it was only LIC of India which paid death claims with simply any little proof of person insured. While all these private companies bluntly denied to pay or even settle a single claim.
Never go on lucrative plans or lower premium rates of Private insurer companies. There are hidden riders or charges once you buy the Insurance. Further, it is hard to receive death claim or even sometimes assured maturity benefits. While there are no hidden charges in LIC of India’s policy plans and it is best with 98.99% claim settlement ratio.
More than one & a half dozen private insurance tycoons are still miles away from the Indian market leader LIC of India. Even after facing the regular discrimination by the Govt. and IRDA as well, LIC of India beats in the hearts of 30 Crore policy holders.
Dear Mr Bajpai
Firstly thank you for your honest opinion about my articles. It gives me a great comfort that my articles are being taken seriously by the readers, in your case, negatively.
A few of my readers are also my clients and perhaps they can only confirm how vehemently I dislike ULIPs and with objective reasons. I do not dislike LIC. I do not prefer any form of insurance that is marketed as investments.
And to give you some comfort on my independence, neither my company nor my associates have any form of relationships with any insurance companies. We ask our clients to source their insurance requirements directly from the insurance companies (if possible online) to save them costs.
It was very nice in terms of detailed calculation of assets & liabilities.
If you can make a Excel sheet which captures all totypes expenses with formulae,it would be of immense help.Thank you for a nice article.