Cost of Life Insurance

• 14th Sep 2016
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Explore the financial aspects of life insurance

If a small payment made today, can help lessen your financial burden when you are in need, wouldn’t you make the small payment? This small payment is the price or premium you pay to get a life insurance cover. It is not just about the amount you pay as a premium, but also about the priceless insurance cover that you get, when in need.

How much does life insurance cost?

A life insurance policy is based on the premiums you pay to the life insurance company. The amount of premiums payable depends upon the type of policy, term of policy contract, sum assured and your age. You could pay these premiums monthly, half-yearly, annually or as single premiums.

How much do you insure for?

One of the simplest rules is to assume that insurance is a replacement for your lost earning capacity. Calculate your total income for the years that you expect to work.

Assuming that the prevailing interest rate is 8%, you need to insure your life for at least 12 times your current annual income. For instance, if a family needs Rs 100 annually for household expenditure and the rate of interest would be at 8%, then the breadwinner needs to have a life insurance policy of approximately Rs. 1200. If the insurance amount were to be put in the bank by the family, the family would get a comfortable Rs. 96 p.a., which would at least enable the family maintain the current lifestyle.

However, to calculate your insurance need more accurately, use the following steps:

Calculate monthly livable income required (post-tax): This is the monthly amount that the survivors of the policyholder will need in the event of death. This is taken at 70% of the current total family expenses. Denote this as “M”.

Calculate monthly income required (pre-tax) as M/(100-t)%, where t is the tax rate. Denote this as “M1”.

Calculate annual income (A) = M1*12.

Estimated-earning rate on capital as 8% (assumed). Denote this as “r”.

Calculate capital livable income required (C) = A / r%.

Subtract existing insurance cover amount (if any) from “C”.

The final amount you arrive at is the amount for which you should buy insurance.

Based on this amount and other factors like your age, the policy you have chosen, etc. the insurance company will help you determine the insurance premium. It is never too late to ensure your loved ones’ future. Buy an insurance policy right away!

- A Consumer Education Initiative series by Kotak Life