Following is the summary of the discussion with a prospective client(Ajay) on Life Insurance
Me(Advisor): Do you have life insurance?
Prospect (Ajay): Yes, I have LIC policy paying Rs 55,000 per annum premium
Me: Ok, what is your life cover(Sum Assured) in that policy?
Ajay: Well, Agent said I will get about Rs 20 lacs after 20years
Me: that’s maturity benefit but I’m referring to sum assured which means how much your family gets if you DIE today
Ajay: is it different from Rs 20 lacs what my agent told?
Me: Yes, Sum assured is different from maturity benefit. In your case, it could be roughly Rs 10 lacs. You can find exact sum assured on your policy bond paper
Ajay: Ok, I don’t know
Me: So 10lacs life cover is sufficient for you?
Ajay: Yes, I think so
Me: How much are your monthly expenses, outstanding loans?
Ajay: Expenses about Rs 30,000 and home loan outstanding is about Rs 32lacs
Me: So your annual expenses = 3.6lacs (30000*12)
Ajay: Yes 3.6lacs
Me: So how long your family can survive with 10lacs and how will they clear loan outstanding if you don’t have insurance against your loan
Ajay: I think they can survive for a couple of years and they cant clear loan and house will be grabbed by home loan lender for auctioning. But is there a better way?
Me: Yes, your insurance coverage should take care of
- At least 20years of household expenses
- Children Education Expenses
- Pay off your loans
Ajay: so you mean to say that I should have at least 1.5-2 crores of life insurance coverage?
Me: Yes, you will need a minimum of 2crores to take care of your family, loans, children’s education.
Ajay: Oh my god, for 10lacs life coverage itself I’m paying Rs 55,000 then how much will be premium for 2crores. Maybe I can’t afford it
Me: Well, the LIC insurance policy that you have now is a mix of insurance and investment and that’s the reason its premium is high
for your age of 32, and life cover of 2crores. You can get term life cover for a premium of about Rs 18,000 per year approximately
Ajay: Oh that’s good to know. I will apply immediately. Thank You, Advisor
Do you hold a LIC policy like Ajay and thinking that it will take care of your family when you are no more on this earth, think again apply the logic discussed in this post. Get adequate life insurance cover
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Names and values changed to maintain confidentiality.