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Monday 15 June 2015

How to decide how much insurance to buy?

It is important to know and understand insurance policies with respect to your finances before you commit to one. 

One critical determinant insurance advisers point out is the human life value, which is nothing but a method of calculating life insurance based on the contribution that an individual makes and would have made to the family in case of a sudden demise keeping in mind the present inflation and bank rates. 

It is an estimate of insurance cover required as on date to protect the income earners' economic value to their families including their future earning potential and capacity.  The amount of insurance one should purchase depends on the policyholder’s economic value or the HLV. To illustrate, let’s say A has monthly income of Rs 10,000. After deducting Rs 5, 000 for his personal expenses he provides Rs 5,000 to his family every month. 

Annually that translates to Rs 60,000. So, in order to keep the current finance available to his family he will need to roughly make an investment of Rs 9, 00,000, which at a risk free rate of return of, let's say, 7 per cent would give Rs 63,000. Hence, A’s HLV would be Rs 9, 00,000.In this scenario inflation has not been factored but in reality that also needs to be considered apart from any tax implications on the income. 

This method can help in terms of deciding your life cover.

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