Many people dwell over the thought that, “Should I get life insurance? Many think that it’s not that important and can be delayed. This article dwells on the importance of life insurance which will help to decide whether you should or need not get a life insurance.
Insurance is subjected to a person’s financial liability. If a person has sufficient assets to handle his liabilities, then that person does not need life insurance. However, it’s important to accurately know your financial liabilities and how to do that? First, you need to know your family’s financial responsibilities & goals and how will they achieve them in your absence. It’s easy to estimate costs for events like children education, marriage & cost of property. However, the difficult thing is to estimate the value of income replacement. Income replacement is a sum total value of monthly household expenses of your spouse between present days till the end of your spouse’s life. This is adjusted against inflation rate, expected rate of return & net tax. Usually, a person’s life expectancy is 85 years. You may consult your financial planner or use current value formulae in excel to do the calculations.
Further step is to ensure how much cash your family will receive if anything happens to them in present scenario. To begin with, note down the total sum assured from your current insurance policies. Also note down the value of life cover from your employer if any & your present net assets’ value. While doing this, value of consumption assets like your present home & gold & other jewelry items should be excluded. When you get the total value, subtract your outstanding liabilities. This will give you your total value of net assets. Also current values of retirement accounts must be included. Remember that your family members may liquidate your financial assets to meet their financial goals anytime.
Now you are aware of the value for “cash required by your spouse in future” & “assured cash to be received by your spouse”. You’ll understand in a better way when you browse through the following illustration.
Mr. & Mrs. Wadhwa have a nine year old son named Paresh. Further you will see how Mr.Wadhwa calculated his life insurance need-
Paresh’s education corpus- Rs. 15 Lakhs
PAresh’s marriage corpus-Rs. 7 Lakhs
Value of income replacement- Rs. 85 Lakhs
Total amount needed [A] – Rs. 107 Lakhs
Total sum assured from all the insurance policies- Rs. 30 Lakhs
Total financial assets’ value- Rs. 45 Lakhs
Current Liability value- Rs. 10 Lakhs
Net financial Asset value- Rs. 35 Lakhs (45-10)
Total amount available [B] = Rs. 65 Lakhs (30 from insurance policies+35 from net financial assets)
Insurance Corpus Gap= Rs. 42 Lakhs (A-B)
In order to bridge this gap, Mr.Wadhwa can get an online term plan of Rs. 45 Lakhs. However, there can be many other cost factors need to be considered as each person’s needs differs according to different situations. Further you can browse through the key points to keep in mind.
The importance of life insurance | Key points to remember-
- You must also include the amount of various investments like ULIP Policy, etc.
- You must consider the profile of your spouse carefully. This is because; it is your spouse who will manage all your wealth when you won’t be around.
- You must involve your spouse while you calculate your insurance corpus.
- You must maintain the balance between the need to cover the risk of finance & insurance cost.
- A psychometric test can help to know yours & your spouse’s risk tolerance.
- You should plan for retirement carefully. When your financial liabilities are fulfilled day by day with steady growth in your financial assets, you will see that your need of insurance decreases gradually.