Life Insurance- Is it worth buying ? How much Life Insurance should I buy? Should I go for term Insurance? What are Life Insurance benefits and disadvantages?
I was addressing a meeting on Financial Planning in Mumbai. There were around 30 participants. I asked a question to the audience.
How many of you are insured? All of them raised their hands.
My next question was – How many of you are adequately insured? Nobody knew whether they were adequately insured or not. The only thing they knew was how much premium they were paying towards Life Insurance.
I asked them a third question – If you die today, how many of you are sure that your family can maintain the same standard of living in your absence? There was a perfect silence!
There lies the real benefit of Insurance.
I explained the participants about the benefits of Life Insurance taking Suresh their Senior Manager as an example.
Suresh is aged 45 and is having 2 daughters; aged 18 and 14. He is getting an annual salary of Rs. 15 Lakhs. His company is offering him a Group Insurance cover of Rs. 20 Lakhs. He is also having a Money Back Policy for Rs. 2 Lakhs from LIC.
Life Insurance – Benefits or Disadvantages for Suresh?
In case of the unfortunate death of Suresh now, his wife will get Rs. 20 Lakhs from his employer’s Group Insurance Policy. She will get another Rs. 2 Lakhs from the LIC policy. He is having around Rs. 5 Lakhs in his PF account and another FD of Rs. 8 Lakhs. He is not eligible for a gratuity since he has joined this company 4 years ago. He is having an outstanding Home Loan of Rs. 8 Lakhs for the house they are staying in now.
What will be the situation of the family after his death?
Let us see the total benefits payable on his death:
- Amount from the company’s Group Insurance – Rs. 20 Lakhs
- Amount from the LIC policy – Rs. 2 Lakhs
- Amount accumulated in his PF account – Rs. 5 Lakhs
- Fixed Deposit – Rs. 8 Lakhs
Total Receipts – Rs. 35 Lakhs
Amount payable towards the Housing Loan – Rs. 8 Lakhs
Balance amount available – Rs. 27 Lakhs
His wife is not working, nor is she having any other income. Now, she is required to spend around Rs. 10,000 per month for her daughters’ education and the household expenses. She has also to manage her daughters’ marriage too.
But with an amount of Rs. 27 Lakhs in hand, she will get around Rs. 18,000 per month as interest, if she invests that money. That amount will not be sufficient for her to meet the household expenses, because Suresh is spending around Rs. 30,000 per month towards the household expenses.
What Suresh has to do now?
The amount required to ensure an inflation adjusted monthly payment of Rs. 30,000 till his wife is aged 75, is Rs. 90 Lakhs. In addition to this, there will be an expense of Rs. 10 Lakhs each for the children’s higher education and marriage. So, the amount required for 2 daughters will be Rs. 40 Lakhs. So, his family requires Rs. 1.30 Crore, if they have to maintain the same standard of living in the unfortunate death of Suresh.
Life Insurance Policy of Rs. 1.30 Crore- Can he afford?
Suresh is paying around Rs. 10,000 per year towards his Rs. 2 Lakhs Money Back Policy. How can he pay the premium for a Rs. 1.3 Crore Policy?
He can afford a Term Insurance Policy at a lesser premium
Yes. He can opt for a Term Insurance Policy for Rs. 1.3 Crore. The annual premium can be as low as Rs. 27,000.
What is a Term Insurance Policy?
In a Term Insurance Policy, the benefit is payable only in case of death of the policy holder. In our example, in case of death of Suresh before the age of 60, his nominee will get Rs. 1.3 Crore, if he pays an annual premium of Rs. 27,000. If he survives till the age of 60, there will not be any payment from this policy.
Is it worth going for a policy with Rs. 27,000 additional expenses every year?
Of course. It is recommended that one should go for such a high value Term Policies to ensure smooth living for its dependents, in case of unfortunate death. Consider the premium of Rs. 27,000 as an additional expense, as you are paying for the peace of mind which you are getting by taking the insurance cover.
Life Insurance Benefits – Is it worth buying?
After this calculation for Suresh, I could see others in the meeting getting busy in calculating their Life Insurance needs. Yes, these are the benefits of Life Insurance. It’s worth paying a small price for it.