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What is the need to buy life insurance and how to calculate the amount to be insured?

It is financially prudent to insure one’s precious life for the following important reasons:

Continuing source of income for your dependents and offspring.

It is an universal truth that whoever born in this world are bound to die and it holds good for young and old and does not spare the poor and the rich.

It is the bounden duty of the head of a family to support their dependents in a fitting way even after their death because they are dependent on the sole bread winner financially.

The calamity may not be in the form of death but in some circumstances, it will affect the health the individual in such a way that the affected is incapable of doing any fruitful work to earn a livelihood.

In such cases, health insurance comes in handy. The compensation from the death will be useful

1. To pay for the last rites towards the funeral and burial expenses, debts and other dues left by the deceased.

2. As a forced savings which will act as corpus fund and the interest accrued will not be liable for tax when the money is paid as death claim. This makes the payment of premium for life insurance as a high priority one.

3. People with no heirs need not bother about the beneficiary of the death claim and they can name any charity of their choice as a beneficiary and these kinds of people make the poorest of the poor feel happy even in their death.

4. Death taxes are in vogue in many states and the dependents of the deceased are at great inconvenience when taxes are to be paid for death.

5. It acts as a source of inheritance to the heirs of the deceased even though the deceased failed to acquire any estate to be passed on to his dependents.

How much insurance is sufficient for me?

The need to insure doesn’t arise at all if you have no dependent and have sufficient money in your kitty to pay for the final expenses. But not all are blessed with this type of situation and in order to leave an inheritance for your beloved ones, the bread winner has to secure his / her life and buy sufficient coverage.

It is better to get adequate life cover that is sufficient to compensate the income earned by you along with other additional expenses that your family members have to incur in the event of your unfortunate loss. Hidden income is another important aspect most of the people fail to realize while assessing the adequacy of the life cover. It includes subsidized group life insurance and health insurance plan offered by your employer. Apart from this, the usual taxes imposed by the state on the deceased like death tax, administrative costs incurred towards winding up of the estate and passing the same to your heirs etc.

How to calculate the amount to be insured?

There is difference of opinions about the amount for which a life insurance is bought for a particular individual. Some are of the opinion to calculate it based on the multiples of salary approach, say 20 times the total salary earned before taxation. This is mainly based on the assumption that the equivalent money earned from salary is compensated when 20 times of the gross salary is invested in bonds, assuming that the interest rate is 5%.

But this calculation suffers from a serious flaw in that it does not take into account the inflation. If inflation is assumed to be 3% a year and taken into account while calculating the total sum assured, the principal amount will disappear in the sixteenth year.

Isn’t there any solace for inflation which nibbles your principle slowly but steadily?

Life insured can feel happy with the social security and the survivors of the life insurance need to pay only the money that is adjusted for inflation upto a period until the older the child attains maturity (18 years). The rest is taken care of by the social security.

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