The Securities and Exchange Board of India (Sebi) offers on its website many calculators that can help you manage your finances now and plan for retirement.
One such tool is called the “Life Insurance Calculator for Young Earners,” which can help you calculate the life insurance coverage that you require.
In a life insurance policy, the insurer promises to pay the insured person's family a specific amount in the event of the insured’s death during the policy term, in return for a yearly premium. Term life insurance does not provide maturity benefits; however, it provides a higher level of coverage for a lower premium.
Says IIT-M Professor Pattabiraman M who developed this calculator, "Most people purchase term insurance without considering the amount of coverage they will need and adhere to thumb rules such as 15 times their annual income. Term life insurance is designed to provide a sum of money that family members can use to generate inflation-indexed income for a period of time."
Says Vinod Koul, a life insurance advisor at LIC: “A life insurance policy’s minimum sum assured depends on the premium you pay, which in turn it depends on your age.”
However, one should buy a life insurance policy with one’s annual expenses in mind rather than buying it based on the minimum sum assured.
Functioning Of Calculator
The Life Insurance Calculator for Young Earners calculates the insurance cover based on annual expenses.
In general, the sum assured should be 12-15 times one’s annual expenses, but this calculator shows a much higher amount because of several other factors taken into consideration.
In the event of the insured’s death, the family will need income to cover expenses, including utility bills, food, school and college fees, and medicine. This is the first column in the calculator where such expenses will have to be entered.
To calculate, one needs enter the number of years they would need this income. Do note that it is safe to enter a number greater than 40 because one should consider a retirement fund for the spouse, as well.
The next column indicates the assets the family can fall back upon to generate income in the bread winner’s absence. However, it should be noted that any assets one does not want to sell, such as a family home, should not be included in this column.
Next, one should enter the current liabilities, such as personal loans and credit card debt. One does not have to include the home loan if one has a separate cover for that. In this column, or in the annual expenses' column, one should factor in long-term goals, such as children’s wedding or a corpus to support them in their higher education.
Here Is the Math
Let’s suppose the monthly expense is Rs 60,000 at an annual inflation of 6 per cent, and you will require this income for 50 years and expect a return of 7 per cent when part of the insurance sum is invested. The assets that can be sold come to Rs. 10 lakh and the current liabilities stand at Rs. 50,000.
Based on the calculator’s results, the amount required for an inflation-indexed monthly income is around Rs. 2.88 crore and the amount required for net insurance is around Rs. 2.79 crore.