Are you adequately insured? Here's how to find out

People end up buying insurance policies assuming they are securing their family's future but little do they realise that their choice of policy is often not right and they are often grossly under-insured.

Not too long ago, when this insurance company entered the market, it was their TV commercial which gave their brand a high recall value. It had actor Irfan Khan talking about an illness called K.I.L.B -- Kam Insurance Lene ki Bimaari (the attitude of under-insuring oneself) -- to unassuming people in the train and the lift. K.I.L.B hit the nail right on its head.

Under-insurance almost defeats the purpose of buying insurance. If you are under-insured, you may be only marginally better than a person who has no insurance at all. By protecting the risk to your life, you are securing the lives of people who matter the most to you, which is your family. It is indeed a difficult territory to tread on; the thought that you may not be there tomorrow and what would happen to your family in your absence. Most people perceive life insurance as a channel to invest money rather than getting a life cover.

So they would look at options where they can get a life cover and even get a part of the money back, if they survive. And here is where they land up with the disease of K.I.L.B. because the right amount of cover along with benefits on survival would indeed cost a lot. So at the cost of getting some benefits, they sacrifice the security of their family and take a lower cover than desirable. Treat life insurance premium as an expense to cover the risk to your life; expense is a sunk cost. Once you are adequately insured through a term plan, which is a pure risk cover, you can then look at investment options, whether in the form of insurance plans or otherwise. But remember, an endowment or a ULIP should never be the first policy you should own.

The author is Chief Evangelist, Perfios.com 

Firstly, understand that you need life insurance only if one or more persons are financially dependent on you. Let us look at how much insurance do you actually need?

Your insurance advisor may show a 'Human life value' (HLV) calculation which you may only partially understand. Since the figure will be huge, you may settle down for certain times your annual salary as insurance. While your advisor may tell you that you need more insurance, s/he would still be happy to sell you a policy than holding her/his ground and losing the customer. But if you were to understand the concept of HLV, you may not think twice before getting the required cover.

So let us look at what exactly is HLV.

There may be different ways of computing HLV but basically the objective of computation is to ensure that in your absence, your family (or any dependant) will have enough money to maintain the current standard of living and be able to meet all critical goals such as the need to educate children, their marriage etc. In more technical terms, it is the present value of all the future expenses till life expectancy to which the present value of all critical goals is added.

Present value indicates value in today's terms. We know that inflation erodes the purchasing power of money, hence to maintain the same standard of living, one has to spend more in future.

Let us take an example to understand the computation. Ravi, aged 35, is married with two children. His wife and children are dependant on him. Their annual expenses are Rs 6 lakh of which personal expenses of Ravi are around Rs 1 lakh. They need to plan for certain critical goals such as education of both their children and their daughter's marriage. Ravi has recently taken a home loan of Rs 30 lakh. Ravi has an insurance of Rs 50 lakh, but he knows it is insufficient.

Let us compute how much insurance does Ravi need (see the table alongside) and what is the shortfall.

Some important aspects relating to the above computation are:

• The amount of Rs 1.68 crores basically means that if this amount were invested at 8 per cent and the household expenses were drawn from it and these expenses increased at 6 per cent annually, this amount would be enough till Ravi's wife is 80 years old.
• Adding liabilities and current value of critical goals is important because these are over and above the regular household expenses.
• Current investments towards goals, other investments and existing insurance can be reduced from the insurance requirement to find the shortfall.

Hence as seen above, although the HLV computation shows a huge figure of Rs 2.5 crore as insurance, that indeed is the amount of insurance Ravi should have. Ideally, insurance requirement changes over a period of time and may eventually keep coming down as investments increase. Therefore, breaking the total cover into two to three policies makes sense since a policy may be discontinued if the cover needs to be reduced. This kind of cover can be bought only through term insurance to ensure that the premium payments do not result in a big hole in your pocket.

Often people know they are under-insured but keep postponing the thought and the actions associated with it. Life is unpredictable and nothing can be more important than securing your family's future. A couple of thousand bucks annually from your bank account may not dent your future savings; it is just a small cost for a huge benefit it may bring in case of an unfortunate event. Folks, let us strive to eradicate K.I.L.B.