Did you know that often insurance is bought when the tax returns are being filed. Most people use Insurance to reduce their tax liability by investing in various tax saving schemes like Life Insurance. But usually the onus is on the amount of premium allocated and not on the sum assured.
Life Insurance Policy is significant if the sum assured is calculated on scientific basis. This article will give you the basics of calculation process.
- Income multiple rule: Sum to be Assured = [(monthly salary-monthly expenditure)*12]*12
Let us understand this better with an example. Suppose there is this person Mr.Ashwin, who is about 30years old, his monthly income is Rs.30,000 and expenditure is Rs.3000. So cover amount should be = [(30000-3000)*12*12] = Rs.38,88,000 (approx.).
- Premium, percent of income: 6% of gross income should be spent towards premium and 1% more for each dependant.
We refer life insurance as a pure term insurance plan which provides death cover with no savings feature. Products like ULIPs and other investment plans with high premiums can also be calculated using this process.
In continuance with the earlier example if we assume Mr.Ashwin has 2 dependants then premium payable towards life protection should be = [(6% * 30000) + (2 * 1% * 30000)] *12 = Rs.28800.
The actual insurance cover would depend on the cost of insurance.
Usually companies buy group insurance cover using this method.
There are few complicated methods used to calculate as well like human life value or HLV, capital estimation as the above methods don’t take into account inflation or different situation specific to each individual’s needs.
HLV is a superior method as it calculated by generating annual income after subtracting the expenses incurred for personal consumption over the working life at an expected rate of interest. It allows you to consider inflation or increase in income to arrive at a defined value.
We at www.bimadeals.com offer calculators which will help you ascertain your needs to bring you peace of mind as it will be best suited to your budget year after year.
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