Use money to control your time…The ability to do whatever you want, whenever you want, is what gives you the most dividends.
The power of money is best explained in Morgan Housel’s book ‘The Psychology of Money’ – it gives you the power to control your own time. Overall, this is the job of life insurance as well. This provides support to the people who depend on you and prevents any depletion of your existing resources. So there is no doubt that adequate life cover is important. India is far behind in this matter. In such a situation, there is a need to reconsider these aspects as to how much life cover people need.
Most Indians look at life insurance as a means of saving and believe that the insurance benefits associated with such products are substantial. So let’s make one thing clear- every person who earns some money and on whom some people are financially dependent, must buy term insurance.
Take the example of Arun for this. He is 35 years old and has a baby girl and his wife is about to have a second child. In such a situation, Arun wants to buy a term insurance and as an established rule, he wants to take a life cover of 10 times his annual income. If it is seen that Arun earns Rs 10 lakh every year, then according to the established rule, he should take a life cover of Rs 1 crore.
However, if calculated correctly, Arun should take a life cover of more than 10 times his income. In other words, chances are high that Arun does not have enough coverage. So how do we decide the minimum life cover he needs?
DIME method
It is the best way to assess the current financial status of any person and his future needs. Here’s what Arun needs to know:
Debt: Provisioning for your recurring debt is very important. Let’s assume that Arun has a student loan of Rs 2 lakh.
Income: You have to see here for how many years you want to provide regular income to your family. If in Arun’s case let’s assume that he wants to provide continuity of income to his family for five years, then he would need at least Rs 50 lakh.
Mortgage: The next step is that you calculate your home loan. This is a huge debt which can affect the financial stability of your family if you are not there. In such a situation, suppose Arun owes Rs 50 lakh as home loan.
Education related expenses:
Arun is the father of a girl child and will need a financial corpus to support his daughter till the age of 25 years. As the cost of education continues to rise, Arun is estimated to need at least Rs 35 lakh for his daughter’s education till her graduation. His wife is going to have a second child, so he will need another 50 lakh rupees for the upbringing and education of his second child.
Keeping all these things in mind, it can be said that Arun will need Rs 1.87 crore for his future but one thing is not included in this. If we assume that Arun has Rs 20 lakh lying with him in the form of FDs and mutual funds, then he will eventually need Rs 1.67 crore. If we assume that Arun dies after 10 years, he would need Rs 2.47 crore (about 25 times his current annual income) as life cover at the rate of 4%.
A personal finance advisor can help you with this. The important thing to note here is that life insurance is not a one-time purchase. You should review your protection requirements from time to time. Especially, at a time when you move slowly through the phase of life. If you have prepared a good life cover for the family, then your family members will have a much better control over their time.
