Dear Friends, we know that insurance has become one of the basis requirements for living a safe and secure life. An insurance provides us safety and financial stabilities in testing time. Through proper insurance ,whether it is on your health, home, or life you can secure future of your beloved in case you are not present in future.

The calculation of exact amount of insurance policy or sub assured under insurance to cover all your future liabilities is a Herculean Task. But it is very important to calculated the type and amount of insurance policy to be taken to secure all future liabilities and to save such amount from insurance so that the level of life will not affect.

An individual should be very clear about the his/her objective to buy insurance. The basis objective of the life insurance to cover risk of life and while all other objectives like saving/investment are secondary.

We have to choose an insurance plan depends upon our present and future need and of course your income.

LET’S FIRST CALCULATE HUMAN VALUE OF A PERSON;

 For example, Mr. A , 25 years aged an Engineer earning Rs. 2,00000/- per month and after deduction of TDS and personal expenses his monthly income is Rs. 125000/-. Let’s suppose he will work till age of 60 years  and there will be @10% increase in his salary every year.

Annual Earning Rs. 24,00,000/-
After TDS and Personal Expenses Rs. 15,00,000/-
Earning Period 35 Years
Let’s consider Rate of interest @8%
Total Earning in 35 years Rs. 40,65,36,550/-
Present Value of Total Earning @8% Rs. 2,74,95,910/-

 We find that Mr. A’a human life value today is Rs. 2,74,95,910/-. But it is not possible for every person to take insurance equivalent to his human value.

Now in this case we have to take insurance policy according to our present and future needs.

LETS’ CONSIDER ANOTHER EXAMPLE;

Mr. B has two dependents his son, daughter and his wife and his future and present liabilities are a follow;

A. FUTURE FUND NEEDED BY MR. B

Sr. No. Dependents Fund Requirements
1 Wife Marriage Education Medical
2 Son 20,00,000 10,00,000  
3 Daughter 50,00,000 10,00,000  
Total   70,00,000 20,00,000  

 B. THE DEBT TAKEN BY MR. B ( CURRENTLY LOANS GOING ON)

1 Housing Loan 40,00,000
2 Car Loan 15,00,000
3 Personal Loan 10,00,000
Total   65,00,000

 C. LETS ESTIMATE COST OF DEATH ( IF MR. B DIED)

1 Medical Expenses 5,00,000
2 Funeral Expenses 2,00,000
3 Unpaid Taxes & Mis 3,00,000
Total   10,00,000

 D. LETS CONSIDER HOW MUCH MONEY MR.B’S FAMILY REQUIRED EACH MONTH ( Keeping at lowest level);

Sr. No. Particulars Until Youngest child is Independent After Youngest Child become Independent
1 Food 30,000 25,000
2 Clothing 10,000 8,000
3 Medical 2,000 2,000
4 Education 10,000 0
5 Recreation 5,000 3,000
6 Miscellaneous 5,000 1,000
Total   62,000 39,000

E. LETS’ CONSIDER THE AVAILABLE SOURCES OF MONEY MR. B LEFT BEHIND

Sr. No. Particulars Monthly Amount Lumpsum Amount (Rs.)
1 Savings Account   5,00,000
2 FDRs   10,00,000
3 PF   10,00,000
4 Gratuity   10,00,000
5 Mutual Fund   10,00,000
6 Insurance   6,00,000
7 Pension per month 15,000  
Total   15,000 51,00,000

 –

Fund Available   Rs. 51,00,000
Immediate Cash Requirements    
As Per Item(B) Rs. 65,00,000  
As Per Item(C ) Rs. 10,00,000 Rs. 75,00,000
Net Funds Available   Rs. -24,00,000

F. CALCULATION OF AMOUNT OF INSURANCE TO BE TAKEN;

Monthly Income Through Pension Rs. 15,000/-
Monthly requirements before Youngest son become independent Rs. 62,000/-
Surplus/Deficit Rs. -47,000/-

G. INSURANCE TO MEET UNPAID FUTURE LIABILITIES

Deficit to meet the marriage & Education Expenses Rs. 90,00,000/-
Deficit to meet loan amount Rs. 24,00,000/-
Total deficit (I) Rs. 1,14,00,000/-

H. INSURANCE TO KEEP MONTHLY FLOW INTACT

Monthly Income Through Pension Rs. 15,000/-
Monthly requirements before Youngest son become independent Rs. 62,000/-
Surplus/Deficit Rs. -47,000/-

 

To meet deficit of Rs. 47,000/- per month the Insurance Requirement will be ( 47,000*12/8%) (II) Rs.70,50,000/-

I. TOTAL INSURANCE NEEDED

Insurance Need of Mr. B ( I+II)   Rs. 1,84,50,000/-
Option I Term Insurance Low Premium
Option II Term Insurance + Endowment Insurance Low Premium but under Endowment Plan Premium will be higher.

Now  we have arrived at a point ,where we can say that Mr. B required Rs. 1,84,50,000/- insurance policy to secure his all present and future liabilities and to provide his family members a secure and hassle-free life.

Conclusion;  After knowing the Insurance need one can decide Best Insurance Policy which will suit his/her requirements keeping in view his/her Annual Income and the Premium Amount. Term Insurance Policy is one of the best policies if you want to cover all your needs, without saving options or your may choose a combination of Term Insurance and Endowment Plant suitable for your conditions. There will be not best plan , but it will depend on your need and when you compare your plan with other available plans.

*****

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.

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Qualification: CS
Company: SBI GENERAL INSURANCE COMPANY LIMITED
Location: MUMBAI, Maharashtra, India
Member Since: 25 Aug 2018 | Total Posts: 130
A Qualified Company Secretary, LLB from Purvanchal University UP and a Science Graducate , Alumni of Banaras Hindu University (Bsc.), having more than 19 years of experience in the field of Secretarial Practice, Project Finance, Direct Taxes ,GST, Accounts & Finance and recently working as a M View Full Profile

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