Page 162 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 8: Insurance Planning

Notes
increase with age. Work out their expenses till they become financially independent that
period should determine the tenure of your cover.
Current liabilities: This is the principal amount outstanding in your various loans (for
example, house, car, personal loans or credit card outstanding).
Future expenses: The major expenses expected in the future like higher education of children
and their wedding expenses. Consider the time horizon and the impact of inflation on
these expenses.
Step 2: Determine your assets Salary
If your spouse is earning, some of the day-to-day expenses can be supported from that
salary.
Current assets: Value of investments like mutual funds, shares, real estate, bonds, and post
office savings. Don’t include the house you live in, as your family will still need to live in
it.
Other payouts: Your pension and insurance plans. This includes pension or superannuation
plans offered by your employer, employee provident fund and life cover from your
existing insurance plans. Many employers provide life cover to their employees through
a group insurance plan. Typically, the cover is a multiplier of the base salary. Check
whether you are covered by such a plan, and add it to the existing cover.

Step 3: Calculate your Life Cover
We will consider the example of the Sharma family, their annual expense is ` 3 lakh and
Mrs Sharma earns ` 1.2 lakh a year. That leaves a shortfall of ` 1.8 lakh. Now, because of
inflation, this amount will increase every year. Assuming the cost of living increases by
4 per cent a year and their corpus earns 10 per cent a year (post-tax), the effective rate of
return is 6 per cent. In order to earn ` 1.8 lakh at that rate, the Sharmas will need a capital
of ` 30 lakh. To this, we add their current liabilities and future expenses. That’s what the
sharma’s need to cover for. Next, we work out how much of this they can meet by what
they have, namely their current assest and existing life cover. The balance is the additional
life cover they need to get.
Once you have calculated the life cover, get a life insurance product that suits your need.
Term plans are the cheapest and most effective. However, they don’t provide any returns,
which is not a bad thing. It is advisable not to mix insurance and investment, as such
products are not the most efficient. The one exception to this rule is a children’s plan in
which the insurer pays the sum assured in case of the insured parents’ death, as well as
continues to pay the future premium to ensure the fund accumulation for children’s
education continues as planned by the parent. Lastly, assess your insurance need every
three years or when there is a change in your family situation for example, marriage, birth
of a child, spouse discontinuing career.
Questions

1. “The amount of insurance you need depends on your personal circumstances, which
comprises of many variables.” What according to you are the most important factors
which an individual should consider before deciding the insurance amount?
2. Discuss the importance of considering “inflation” as a crucial factor while deciding
the insurance amount.

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