"DOES my family really need Rs 2 crore on my death?"
When I suggested Rs 2 crore as sum assured for a customer, this was his immediate reaction. Typical of us, I thought. When a sales person gives us a product/scheme our first thought goes to the 'commission' he or she makes. I keep wondering why.
Even our vegetable vendor has to assure us that the last rupee that we try to squeeze out of him is what he makes. It makes us feel happy. We completely forget that we need tomatoes, which we can afford, and which we like. Why should it be our concern how much he makes?
So, I set out to tell the client the following.
We buy life insurance to replace income lost due to the death of the breadwinner. The amount of life insurance you need depends on the 'income stream' you would want to continue for your family if anything happened to you.
Let's say you earn Rs.800,000 a year. This money provides your family's lifestyle and standard of living. As long as you are alive and well, your loved ones will remain financially secure.
What happens when the breadwinner (read 'You') are no longer able to earn this money? Bluntly, if you died tonight, what would your family do? How would they pay the home loan EMI, car loan, society charges, utilities, taxes and other bills? Where would the money come from for new clothes for your children, for college fees, or even for your spouse to enjoy an evening out with friends?
Very few people are comfortable answering this question. They live like they will never die and most will die like they never lived. When you have lived a good life, and have a family that you 'love' your answers have to be far, far better than these…
| What you say | What you really mean |
| My family will get by | You do not know |
| My family could cut back expenses | You do not know how |
| My family could sell the house or other assets | You have only one house which is your only asset |
| I don't know | Aha, the truth! |
That's why we buy life insurance. So that the answer to that question is, without hesitation or doubt: "They'll be provided for."
How much life insurance do you need? The chart below shows the annual income the insurance proceeds can generate based on the following assumptions: The beginning amount will earn a 5% return after taxes, with principal and interest depleted in 20 years by withdrawing an amount equal to 8% of the original principal every year. Note that different assumptions will generate different results.
| Life Insurance Amount | Annual Income It Will Generate |
| Rs. 1,000,000 | Rs. 80,000 |
| Rs. 2,000,000 | Rs. 1,60,000 |
| Rs. 4,000,000 | Rs. 3,20,000 |
| Rs. 5,000,000 | Rs. 4,00,000 |
| Rs. 10,000,000 | Rs. 8,00,000 |
| Rs. 20,000,000 | Rs. 16,00,000 |
Example: A life insurance death benefit of Rs.10,000,000 would provide your family with an income stream of Rs.800,000 a year for a 20-year period, after which the entire amount would be depleted. So, if you earn Rs.800,000 a year, you may wish to consider Rs.10,000,000 of life insurance.
How expensive is that? That depends on a number of factors, including your age, health and personal habits (such as whether or not you smoke), and type of insurance.
Also read: PV Subramanyam's blog
Photograph: Vipurva Parikh
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