How much coverage do I need?

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Am Glad to see that Insurance companies and its agents have started talking about “ADEQUATE” coverage. When the bread winner of a family dies in his/ her prime earning age – How much is Adequate? If his / her income is say 6 Lakhs rupees year (After Tax) – the family would have a life style for 5 Lakhs per year (assuming that they are Financially Prudent and save about 15% of the income) – we can deduct personal expenses of the person died and some luxury expenses making the most minimum to survive at Rs 4 Lakhs for year #1, it will keep increasing at around 5% every year (effect of inflation) 10th year they will need in excess of 6 Lakhs and the same will be 10 L in year # 20.

Principal Protection is of Paramount importance in funds like these. Hence the family cannot Invest the insurance amount in risky options. It would be safe to assume that they can only withdraw 5% of the Corpus available so that they don’t run dry in less than 20 years. We can consider the mid point of the 20 year duration – year # 10 and the corresponding expenses which is 6 Lakhs. Corpus should be Rs 1.2 Crores for them to be able to withdraw that amount comfortably.

The first 9 years, the corpus would yield more than the requirement amount and the same should be invested to offset the shortfall they will face from year # 11 and or any other unforeseen expenditure in future.

So, it would be safe to assume that 20 times of one’s annual income is ADEQUATE coverage, 10 times of annual income is the most minimum one should have as coverage.

It is practically impossible to buy any meaningful (read as Adequate) coverage with Endowment or Whole Life or Money Back or ULIP policies which brings the conversation to our rather my favorite topic – yes, you guessed it right – TERM POLICY – That is the ONE AND ONLY solution to your Life Insurance needs.

Color, Brand and options of the umbrella are irrelevant but the Size is super important. Buy from any Insurance Company but Do not Fall in the trap of Endowment policies and insist on Adequate coverage which only a Term policy can provide.

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