I thought of writing about goal setting in today’s blog, but I changed my mind to discussing adequate insurance cover. Protection comes before planning, because without it, unexpected events can derail even the best financial plans. 

Suppose, you have set your financial goals. If life goes smoothly,  you are likely to achieve most of them. But nothing in life is certain.  To safeguard your financial journey  – and more importantly,  to protect yourself from unexpected setbacks or disasters – you need adequate insurance, whether life or non- life. The real question is : how much insurance is enough?  

Let’s go back to our earlier case study of Ravi,  whose family’s monthly survival expense was ₹46,000. We assume he had adequate health insurance for medical emergencies for his family. But Ravi, just 32 years old,  dies suddenly in an accident.  Imagine the devastating situation his wife now faces. All their future financial goals collapse in an instant. Forget about the long-term plans – her immediate struggle is simply how to keep the family afloat. 

As mentioned in my previous blog, Ravi’s family had monthly expenses of ₹46,000. With his passing,  these expenses may reduce slightly  – to around ₹40,000.

Let’s  make one more assumption.  Suppose, Ravi had a home loan of ₹25 lacs, for which he was paying an EMI of ₹20,000 – the same amount we had earlier considered as rent. So, in this case, it’s not rent but an EMI obligation. 

The key question now is – if Ravi is no longer around, what should have been the right amount of life insurance cover to protect his family?

There is one more aspect Ravi needed to consider  – the future interest rate scenario.  Suppose,  he assumed a return of 7% from safe options such as Triple-A rated Fixed Deposit,  a Bond, or the Post Office Monthly Income Scheme. 

At 7% interest,  an investment of ₹100 generates ₹7. Put differently, to earn X, one needs to invest X/7×100. In Ravi’s case his wife requires ₹40,000 per month for household expenses plus another ₹20,000 for the home loan EMI to retain their shelter. That  means a total monthly requirement of ₹60,000.

Per annum it is 60,000×12 =₹7,20,000

• So, our ‘X’  is ₹720,000
• To earn 7,20,000 p.a., Ravi needs a Fund of 100/7×7,20,000 = ₹1,02,85,714
• 7X/100 = 7,20,000
• X = ₹1,02,85,714 

Rounded off ₹1 Crore. This is the Insurance Cover, taken by him. His wife now received this amount. 

She will pay off the Home Loan of ₹25 lacs, left with ₹75 lacs.

The interest @7% on ₹75 lacs gives her ₹5,25,000 p.a. 

5,25,000/12 = ₹43,750  per month.

We have not taken into account other financial goals like a child’s higher education, marriage etc. In such a case, the insurance cover would be more. His child is just 3 year old. He is expected to earn after say 20 years. During this crucial stage, the family will not suffer financially due to Ravi’s wise decision. One more point that we should have taken into account – the gold or other investment of Ravi’s family. That’s one cushion. 

I have one suggestion for Ravi’s wife. She should try to save ₹3000 p.m. to beat the inflation as after 10 years the monthly expenses would be double and after 20 years it would be ₹1,60,000 p m. assuming an inflation of around 7% per annum. 

Moreover,  the current rate of interest may come to 5% after say 8 or 10 years. So, her  interest income will fall to ₹3,75000 (5% on ₹75 lacs).

Per month: 3,75,000/12 = ₹31,250.

The worry  is, monthly expenses will keep increasing due to inflation. In the 20th year this will reach as high as ₹1,60,000 per month as I have just mentioned. 

She would be lucky, if inflation comes down and rate of interest goes up. But we should be prepared for the worst case scenario. 

For a long term investment, I would suggest a systematic investment plan with exposure in large, mid and small- cap exposure in equity through mutual fund. Assuming a return of 12% the investment would grow to ₹ ₹29.97 lacs in 20 years. @15% it is ₹98.52 lacs. @ 18% it is ₹1.75 crore. 

So, you can see the shortfall now. During this crucial 20 years , she will start feeling the pinch gradually after 7 or 8 years as slowly and inevitably the price rise will reduce her purchasing power. Once her child reaches its teen  may be , she could do a part time job or business. On excel sheet or on pen and paper calculating is easy but in real – life situation,  there could be so many’ ifs’ and ‘buts’.  Here, I’m trying to bring this case as a food for thought. Now, at this point, I’m convinced that even ₹1 crore insurance is not enough for them  as we have not provided for their dreams – higher education,  marriage, etc. and undervalued the impact of inflation. 

So, the basic idea is to replace the Income/Salary of Ravi. It’s like the BMC water that comes to your kitchen and washroom  everyday. And, imagine if it stops for even a few days. So, replacing salary or income by interest income or rental income through the insurance cover is how you protect yourself or your family. 

In this regard let me caution you that a large number of insurance agents do wrong selling by offering you Traditional Plans where you get a Life Cover of mere ₹1 lac or ₹2 lacs by paying ₹5000 or ₹10,000 insurance premium per annum. Ravi had taken a ₹1 crore Term Plan with a premium of ₹10900 per annum. The premium is not refundable. But, it covers your risk. It’s like a car insurance. If accident happens, you are paid. 

Had he gone for a traditional plan where his ₹2 lacs would become around ₹ 4 lacs after 20 years [ ie basic sum assured 2 lacs and bonus say 2 lacs assuming a 5% bonus on sum assured every year i.e., ₹10,000×20 yrs]. This is when he doesn’t die.

If he dies say, on 6th year, her wife gets the basic cover of ₹2  lacs plus bonus @₹10,000 ×6 = ₹60,000. 

Total ₹2,60,000. 

If she goes for an FD @7% interest, the Interest amount is only ₹18,200 per annum on her ₹2,60,000.

Per month it is ₹1517. With this amount she can afford to book a gas cylinder only!

For growth, invest. Invest in FD, MF, Gold or Property. But, buy the right cover, neither less nor more. Please don’t mix insurance with investment.  Keep it separate. Be smart. Go for a Term Plan.

Just like your emergency fund, adequate insurance  – both life and health – is non- negotiable, unavoidable and a must to protect your financial goals. 

Remember,  insurance is not an expense, it’s a shield that keeps your dreams safe.

A single medical bill or a mishap  can derail years of planning. This is like a lock in your financial house– without it, everything is at risk.

What I explained out here, is the ‘need approach ‘  There is another way how you can figure out the Life Insurance Cover.  It’s called Human Life Value  Approach. I don’t want to increase the length of the blog further. We can do it later on.

With this, we complete today’s discussion on why insurance,  along with other Investments, is a non- negotiable part of financial planning. Ravi’s example shows  us how a little foresight today can safeguard decades of tomorrow. 

I’ll pause here for now and meet you again with my next blog on Sunday, where we’ll take this journey forward. Till then,  stay mindful, stay prepared.

Disclaimer: The information provided in this blog is for educational and informational purposes only and should not be construed as financial advice. Readers are encouraged to consult a qualified financial advisor before making any financial decisions. All views expressed are personal.