Tuesday, 12 November, 2013

Importance of Insurance - Part 3

Be safe or You'll be sorry! Part 3

Here's the next part of my continuing coverage on Insurance. You would have read my earlier post on whether you need Life Insurance in the first place:

In this post, I propose to talk about how to identify the quantum of amount for which an individual should obtain a life cover.

At the outset, let's be clear on what should NOT be the amount of coverage that you require:

  • It should not be the amount recommended / suggested by your friend, parent, spouse, child, financial advisor, blog author, insurance agent, bank manager.

Clearly, each of the above will have his/her own reasons to suggest varying amounts as "just the right quantum" for you. While some may have your genuine needs in mind, others may have ulterior motives. However, it is unlikely that any of them will have a clear and holistic idea about your current situation and hence, you can't depend on their suggestions.

You need to keep in mind various factors while determining the amount for which you should buy a life insurance policy. Some of these would include:

  • Your personal profile - age, academic / professional qualifications, job profile, current income, future prospects
  • The number of financial dependents, their ages and the period for which they are likely to remain financially dependent on you
  • Your current wealth level
  • Your desire to "care for" those who are financially dependent on you (this factor is often ignored by most people including competent financial advisers due to their emphasis on being "politically correct" - As you're aware, I give a damn!)

Each one of the above will influence the amount for which you need to obtain life insurance cover.

The actual amount will obviously vary from person to person. And the only person who can identify it is the person whom you meet every day when you look into the mirror. But it would help to keep in mind the broad (and simple) rules of thumb:

  • The more the number of financial dependents whom you care for, the higher you need to buy life insurance
  • The better your academic / professional qualifications, the higher your future potential is likely to be. Obviously, when you die, the financial loss would be that much greater. Obviously, you need to think of a higher life insurance amount
  • Ditto for higher income / wealth levels, the stability of your job, etc.
  • The younger you are, the longer you're likely to live, earn and prosper. This warrants a higher sum assured for your life.
  • The number of years for which your dependents will need to survive after your death before they get a meaningful alternative source of sustaining themselves
  • Your ability to afford to pay the premium REGULARLY for servicing the policy that you take based on the amount arrived at after taking into account all the above factors

Obviously, you can't have a "one-size-fits-all" formula to calculate the ideal amount for which an individual needs to buy insurance. Every individual needs to identify the amount required on his/her own.

You calculate the amount required by you - By the time you've identified the amount required, I hope that my next post would be ready to help you further in the process to be followed to identify the appropriate life insurance policy for you.

Watch this space!



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