If we ask a typical agent, they come up with the magical figure of 10 times of annual income. I was also advised this almost an year ago. The logic they probably have is that a person with X income would easily be able to pay "X/some number" amount of premium easily. At least I don't subscribe to this logic.
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Consider Mr X: A typical Indian family man
He is married
30 years
Has a home loan for which monthly installment is 35k
Has a car for which installment is 10k a month
Has dependent parents, non working wife and a one year old girl child
Earns 10 L PA (take home after taxes)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
As per our bright insurance adviser, he should take cover of worth 1 crore.
Suppose Mr X is dead now and his family gets 1 crore. As per current standard of living the monthly expenses would come around 10-15k. Lets take 10k for simplicity of calculation.
Total amount needed monthly 35 + 10 + 10 = 55k
Lets assume that Mr X's family will keep 1 crore in some FDs (considering the 0 risk tolerance) which will safely beat inflation (a big assumption). With 55k as monthly expense, 1 crore would barely last for 15 years. ( I have assumed that car loan will always continue, it will not make much difference int the final conclusion)
This amount doesn't include cost of sudden medical emergencies (which are very likely due to old parents and young child). It doesn't include the cost of education which is going to be very high as time passe and this amount certainly doesn't include the cost of marriage of his girl child.
If we include these factors, the insurance amount should be increased by at least 50 lakhs.
But no adviser will suggest you because they are not trained to do so.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Now lets take Mr Y, a typical software professional
He is married
30 years
Doesn't have a home loan, his parents have one for him
Has a car for which installment is 10k a month
Has dependent parents
A working wife and a one year old girl child
Earns 10 L PA (take home after taxes)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Suppose Mr Y is dead now and his family gets 1 crore. As per current standard of living the monthly expenses would come around 10-15k. Lets take 10k for simplicity of calculation.
Total amount needed monthly 10 + 10 = 20k
Lets assume that Mr X's family will keep 1 crore in some FDs and Equity mutual funds (considering there is one earning member, thus some risk can be taken) .
Lets assume 50L is invested in FD (and MIP) and rest is invested in Equity MF (assume 15% CAGR very safe assumption) .With 20k as monthly expense (in this case car loan will actually stop much before), invested 1 crore would last for more than 70 years. And if invested properly, it will last for even more.
Mr Y's wife's earning will easily take care of his daughter's future cash flow needs.
With the help of these two examples, we can easily establish that the magic figure 10 doesn't make any sense. Cover amount should be estimated individual's risk profile and current financial condition.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Consider Mr X: A typical Indian family man
He is married
30 years
Has a home loan for which monthly installment is 35k
Has a car for which installment is 10k a month
Has dependent parents, non working wife and a one year old girl child
Earns 10 L PA (take home after taxes)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
As per our bright insurance adviser, he should take cover of worth 1 crore.
Suppose Mr X is dead now and his family gets 1 crore. As per current standard of living the monthly expenses would come around 10-15k. Lets take 10k for simplicity of calculation.
Total amount needed monthly 35 + 10 + 10 = 55k
Lets assume that Mr X's family will keep 1 crore in some FDs (considering the 0 risk tolerance) which will safely beat inflation (a big assumption). With 55k as monthly expense, 1 crore would barely last for 15 years. ( I have assumed that car loan will always continue, it will not make much difference int the final conclusion)
This amount doesn't include cost of sudden medical emergencies (which are very likely due to old parents and young child). It doesn't include the cost of education which is going to be very high as time passe and this amount certainly doesn't include the cost of marriage of his girl child.
If we include these factors, the insurance amount should be increased by at least 50 lakhs.
But no adviser will suggest you because they are not trained to do so.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Now lets take Mr Y, a typical software professional
He is married
30 years
Doesn't have a home loan, his parents have one for him
Has a car for which installment is 10k a month
Has dependent parents
A working wife and a one year old girl child
Earns 10 L PA (take home after taxes)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Suppose Mr Y is dead now and his family gets 1 crore. As per current standard of living the monthly expenses would come around 10-15k. Lets take 10k for simplicity of calculation.
Total amount needed monthly 10 + 10 = 20k
Lets assume that Mr X's family will keep 1 crore in some FDs and Equity mutual funds (considering there is one earning member, thus some risk can be taken) .
Lets assume 50L is invested in FD (and MIP) and rest is invested in Equity MF (assume 15% CAGR very safe assumption) .With 20k as monthly expense (in this case car loan will actually stop much before), invested 1 crore would last for more than 70 years. And if invested properly, it will last for even more.
Mr Y's wife's earning will easily take care of his daughter's future cash flow needs.
With the help of these two examples, we can easily establish that the magic figure 10 doesn't make any sense. Cover amount should be estimated individual's risk profile and current financial condition.
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