Page 45 - The Insurance Times January 2022

CALCULATING LIFE

COVER ON A

'DIME'

M organ Housel’s book ‘Psychology of Money’ Income: Consider the number of years you want to provide

does a great job of explaining the power of
an income replacement for your family and multiply your
money – it can give you control over your own
current income by that number. Assuming Arun wants to
time. That in a nutshell is the function of life
insurance. It enables financial continuity for your dependents create income replacement for 5 years, he will need a corpus
of at least ?50 lakh.
and avoids a drain of your existing resources. So, it is quite
irrefutable that adequate life cover is critical. Here, we revisit Mortgage: The next step is accounting for a home loan, which
the factors that can help people determine how much life
can derail your family’s monetary stability in your absence.
cover they need.
Let’s assume, Arun has an outstanding home loan of Rs. 50
lakh.
Most Indians continue to perceive life insurance as a savings
vehicle and believe that the insurance benefit attached to
such products is adequate. So, let’s clarify one thing – every Education Expense: Considering Arun is a father, he will need
earning individual with financial dependents must buy term to create a financial corpus to support his daughter until she
turns 25 years of age (typically when kids start earning). With
insurance.
education cost constantly on the rise, Arun will need an
Take for example Arun, a 35-year-old married person with estimated Rs. 35 lakh until graduation of his child. With
one kid and a second one on the way. He is looking to buy a another baby on the way, he wants to make an additional
term insurance and decides to rely on the general thumb provision of Rs. 50 lakh for the upbringing and education of
rule – a life cover must be 10 times your annual income. his second child.
Considering Arun earns Rs. 10 lakh per annum, the thumb
rule would suggest his ideal life cover is Rs. 1 crore. All these factors summed up show Arun’s future requirement,
which is Rs. 1.87 crore. But there is one missing ingredient –
While this is a good thumb rule to determine the minimum it doesn’t account for his existing assets. Assuming he has
cover required, an individual often needs more than 10 times
assets worth ?20 lakh in the form of fixed deposits and mutual
his / her income. In other words, it is highly likely that Arun is
funds, Arun’s final financial requirement is Rs. 1.67 crore.
inadequately covered. So, how can he determine his Assuming Arun passes away after 10 years, then at a 4 per
multiplier?
cent inflation rate per annum, he will need a life cover of Rs.
The DIME method is a holistic tool for assessing one’s current 2.47 crore (nearly 25 times his current annual income).
state of finances and future needs. So, here’s what Arun needs
to know: Personal finance advisors can support you in this process.
One key factor to always remember is that life insurance is
Debt: Your liabilities survive you and therefore provisioning not a one-time purchase. You must review your protection
for recurring debt is very important. Let’s assume Arun has requirements at regular intervals, especially as you progress
an outstanding student debt of Rs. 2 lakh. through various life stages. (Source: Business Line)

The Insurance Times, January 2022 45