Financial Protection- Insurance as a Tool

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While we plan assiduously for wealth creation, seldom do we think of financial protection to the family in case of untimely death of the breadwinner. Somehow, we take it for granted that nothing untoward would happen to us and we are there forever for the family. While we pray nothing of this sort should happen, it is our responsibility to ensure adequate financial protection for the family in case we are not around.

Hence it is paramount that adequate insurance at the earliest is in place to avoid financial turbulence. There are multiple methods to find out how much insurance coverage is needed to cover oneself fully. We present below the need-based approach analysis.

Need-Based approach Analysis: This method would help us to arrive at a near accurate way of arriving at insurance requirements. The factors to be considered are:

  • Net Disposable Income
  • Inflation
  • Assets/Liabilities
  • Existing insurance cover
  • Financial goals.

Based on the above five factors we arrive upon actual cover requirement. It is always advisable to calculate insurance coverage requirements every 5 to 6 years.

We append below a case description for replacement of income in case of untimely death of the insured:

Case Description:

Mr. A’s current age is 30 and he would like to retire at the age of 60. His current income is 10 lacs and self-expenses percentage is 10%. He owns several assets, Fixed deposit of Rs.15 lacs, Self occupied house Rs. 25 lacs, Gold/Silver/Jewelry Rs. 10 lacs, PPF Rs. 8.5 lacs, Equity/MFs Rs. 5 lacs. His liabilities include a home loan of Rs. 13 lacs, Personal loan Rs. 4.5 lacs and Vehicle loan Rs. 2.5 lacs. He has to create a corpus for his daughter’s Higher Education and Marriage.

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Net Coverage Required is arrived at considering Present Value of future cash flows after adjusting for life style inflation. 

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It is evident from the above case that an additional coverage of Rs.2.33 crores is required to cover the financial goals and for the family to continue the present life style even in the absence of the insured.

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