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Calculating Sum Assured

Calculate the sum assured of your term insurance that would be adequate for your dependents using these steps

I am planning to buy a ₹2 crore sum assured Term Insurance policy. As per my calculation - the amount of ₹2 crore should be adequate to take care of expenses of my financial dependents (insurance nominees).
I am assuming that tomorrow if am no more, this amount will be deposited by my dependents in a FD that gives about 9% interest a year. The interest amount would be equal to my yearly income as of today.
However, if my dependents get this sum after say, 10 years, the interest will surely not be sufficient for them as inflation would have reduced the purchasing power of this money. Can you please help me understand how I can calculate a more accurate sum assured taking into account inflation for next 30 years and also taking into account special expenses that might arise in future in my absence (say child's marriage/education etc)?

- Vishal Rathi

You seem to have a very good understanding of investments and therefore it is better that you use logic to calculate the sum you would require on your own. Please follow these steps:

  1. Estimate your living expenses: Life insurance cover should aim at providing same standard of living even in your absence. Ascertain the following expenses:
    • your annual household expenses
    • liabilities like home loan, personal loan, education loan etc
    • the value of your goals such as children higher studies, daughter's marriage. Having done this, you may adjust them for a 7% or 8% inflation rate.
    For example, if you are willing to spend ₹20 lakh in today's value on your child's marriage, assuming you have 10 years to the event, you would need an inflation-adjusted sum of ₹40 lakh after 10 years. Based on inflation of 7%, you can calculate this future value on using the formula FV=PV*(1+R/100)^N where,
    FV is Future Value
    PV is Present Value
    R is rate of inflation
    N is number of years to goal
  2. Estimate your Savings, Investments and Other incomes: Ascertain your existing savings and investments in the following:
    • mutual funds
    • stocks
    • post office
    • bank
    • Second house or any plot of land bought with an intention of investment. Do not consider the home where you are living because you would definitely not want to sell it to fulfill any goals in future unless there is no option left (god forbid!).
    • Any other source of income such as rental income from let out property
  3. Subtract your total savings, investments and other incomes derived in Point 2 from total living expenses derived in Point 1. Resulting figure is the estimated value of your life insurance requirement. If the resulting figure is in negative, you do not need a life cover. But, you might buy a life cover for a small amount to protect your assets in case of need. Some insurers provide a Human Life Value Calculator to help in calculating your estimated life insurance requirement.

Once you calculate your sum assured, go for a pure term plan. You may also diversify with policies from two different insurers if your resultant life value is high. Just in case the need arises, and your family members receive the sum, they would further need to manage and invest the sum properly and systematically to fulfill all pending goals and take care of daily expenses out of the sum.

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