CA Loan Bajaj Finserv
CA Final Online Classes
CA Classes

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More

How To Calculate Amount Of Insurance Cover You Need In Case Of Casualty

CS Deepak Pratap Singh 
on 17 March 2021

LinkedIn


Dear Friends, we know that insurance has became one of the basic requirements for living a safe and secure life. An insurance provides us safety and financial stabilities in testing time. Through proper insurance, whether it is on your health, home, or life you can secure future of your beloved in case you are not present in future.

The calculation of exact amount of insurance policy or sub assured under insurance to cover all your future liabilities is a Herculean Task. But it is very important to calculate the type and amount of insurance policy to be taken to secure all future liabilities and to save such amount from insurance so that the level of life will not affect.

An individual should be very clear about his/her objective to buy insurance. The basic objective of the life insurance to cover the risk of life and while all other objectives like saving/investment are secondary.

We have to choose an insurance plan depends upon our present and future need and of course your income.

LET'S FIRST CALCULATE HUMAN VALUE OF A PERSON

For example, Mr. A , 25 years aged an Engineer earning Rs. 2,00000/- per month and after deduction of TDS and personal expenses his monthly income is Rs. 125000/-. Let's suppose he will work till age of 60 years and there will be @10% increase in his salary every year.

Annual Earning

Rs. 24,00,000/-

After TDS and Personal Expenses

Rs. 15,00,000/-

Earning Period

35 Years

Let's consider Rate of interest

@8%

Total Earning in 35 years

Rs. 40,65,36,550/-

Present Value of Total Earning @8%

Rs. 2,74,95,910/-

We find that Mr. A's human life value today is Rs. 2,74,95,910/-. But it is not possible for every person to take insurance equivalent to his human value.

Now in this case we have to take insurance policy according to our present and future needs.

How To Calculate Amount Of Insurance Cover You Need In Case Of Casualty

LETS' CONSIDER ANOTHER EXAMPLE;

Mr. B has two dependents his son, daughter and his wife and his future and present liabilities are a follow;

A. FUTURE FUND NEEDED BY MR. B

Sr. No.

Dependents

Fund Requirements

1

Wife

Marriage

Education

Medical

2

Son

20,00,000

10,00,000

 

3

Daughter

50,00,000

10,00,000

 

Total

 

70,00,000

20,00,000

 

B. THE DEBT TAKEN BY MR. B ( CURRENTLY LOANS GOING ON)

1

Housing Loan

40,00,000

2

Car Loan

15,00,000

3

Personal Loan

10,00,000

Total

 

65,00,000

       

C. LETS ESTIMATE COST OF DEATH ( IF MR. B DIED)

1

Medical Expenses

5,00,000

2

Funeral Expenses

2,00,000

3

Unpaid Taxes & Mis

3,00,000

Total

 

10,00,000

       
 

D. LETS CONSIDER HOW MUCH MONEY MR.B'S FAMILY REQUIRED EACH MONTH ( Keeping at lowest level);

Sr. No.

Particulars

Until Youngest child is Independent

After Youngest Child become Independent

1

Food

30,000

25,000

2

Clothing

10,000

8,000

3

Medical

2,000

2,000

4

Education

10,000

0

5

Recreation

5,000

3,000

6

Miscellaneous

5,000

1,000

Total

 

62,000

39,000

E. LETS' CONSIDER THE AVAILABLE SOURCES OF MONEY MR. B LEFT BEHIND

Sr. No.

Particulars

Monthly Amount

Lumpsum Amount (Rs.)

1

Savings Account

 

5,00,000

2

FDRs

 

10,00,000

3

PF

 

10,00,000

4

Gratuity

 

10,00,000

5

Mutual Fund

 

10,00,000

6

Insurance

 

6,00,000

7

Pension per month

15,000

 

Total

 

15,000

51,00,000

Fund Available

 

Rs. 51,00,000

Immediate Cash Requirements

   

As Per Item(B)

Rs. 65,00,000

 

As Per Item(C )

Rs. 10,00,000

Rs. 75,00,000

Net Funds Available

 

Rs. -24,00,000

F. CALCULATION OF AMOUNT OF INSURANCE TO BE TAKEN

Monthly Income Through Pension

Rs. 15,000/-

Monthly requirements before Youngest son become independent

Rs. 62,000/-

Surplus/Deficit

Rs. -47,000/-

I. INSURANCE TO MEET UNPAID FUTURE LIABILITIES

Deficit to meet the marriage & Education Expenses

Rs. 90,00,000/-

Deficit to meet loan amount

Rs. 24,00,000/-

Total deficit (I)

Rs. 1,14,00,000/-

II. INSURANCE TO KEEP MONTHLY FLOW INTACT

Monthly Income Through Pension

Rs. 15,000/-

Monthly requirements before Youngest son become independent

Rs. 62,000/-

Surplus/Deficit

Rs. -47,000/-

To meet deficit of Rs. 47,000/- per month the Insurance Requirement will be ( 47,000*12/8%) (II)

Rs.70,50,000/-

 

G. TOTAL INSURANCE NEEDED

Insurance Need of Mr. B( I+II)

 

Rs. 1,84,50,000/-

Option I

Term Insurance

Low Premium

Option II

Term Insurance + Endowment Insurance

Low Premium but under Endowment Plan Premium will be higher.

Now we have arrived at a point ,where we can say that Mr. B required Rs. 1,84,50,000/- insurance policy to secure his all present and future liabilities and to provide his family members a secure and hassle-free life.

Conclusion

After knowing the Insurance need one can decide Best Insurance Policy which will suit his/her requirements keeping in view his/her Annual Income and the Premium Amount. Term Insurance Policy is one of the best policies if you want to cover all your needs, without saving options or your may choose a combination of Term Insurance and Endowment Plant suitable for your conditions. There will be not best plan , but it will depend on your need and when you compare your plan with other available plans.

Disclaimer

The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.


Tags :



Category Others
Other Articles by -
CS Deepak Pratap Singh 

Report Abuse

LinkedIn



Comments


update

X

Do you have any Tax Queries

Submit