Monday, August 10, 2009

How much Life Insurance (Maut ka Sauda) do you really need?

Time – 7.15am – a sunny Sunday morning in July…. I finished second cup of tea and both newspapers too.. I had nothing better to do in a peaceful morning and hence switched on TV. While I was watching a crazy bolly movie – Maut Ka Badla Maut ! on Zee Cinema, an old friend of mine – Mahesh (name changed) called me up on my cell and wished for appointment to take me through INSURANCE needs of mine. Mahesh (name changed) – is an Electrical Engineer, left job in Bharat Forge and started a full fledged practice as Insurance Agent and Investment Advisor. Since he is my old school mate, I invited him to my residence at 10.00am on the same day.
Mahesh being a true professional came sharp at 10.00am while I wasn’t really ready since Maut ka Badla Maut with another 2 cups of tea kept me busy for 2 hours. Mahesh and I exchanged greetings and few words before he started with his business script. I was smart enough to set the objective that if I am convinced completely with Insurance schemes, then only I may think of buying it.
He didn’t open the file containing insurance scheme broachers, but said – “Lets figure out HOW MUCH INSURANCE DO YOU NEED”. He asked me about following details –
1. My current salary (monthly and annual)
2. My Monthly Expenditures (I wasn’t aware of the figure, but confidently said Rs. 15000).
3. Date of Birth
4. Remaining expected years of salary (He assumed it as 32 years, although I want to retire after 15 years from now).
5. Highest Educational Qualification and other details
He then opened some ready-reckoner (handbook) and did some heavy and complex computations, used calculator, plain paper, inflation-deflation factors (while I was busy watching famous Cat-fight in Maut ka Badla Maut), he said 1 Crore 5 Lakh!!!! 1.05 Crore is the Insurance Coverage you need, Mr. Vaidya. That reminded me story of bolly movie “Judai” where Sridevi sold her husband Anil Kapoor to Urmila for 1 Crore. I thought she would have achieved this by buying an Insurance Policy.
Now I was surprised, felt proud with my life worth of 1 Crore and then shocked with the insurance premium amount. When I asked explanation, Mr. Mahesh gave me dozens of reasons on why I need Insurance coverage of 1 Crore. Some of the reasons were –
1. If you are earning X salary today, you would be earning 10X salary on your retirement and hence, if you die today, your family (dependents) should survive without your salary for another 32 years.
2. In case of any misfortune with you, your house which is bought on Home Loan may get seized.
3. Even after your retirement, you need at least Rs. 60000 for monthly expenses (considering my expenses will grew in same proportion to my income and multiplied with inflation factor).
4. Returns on your investment – Mr. Mahesh’s Insurance company gave returns of 289% on investments made since past 8 years and 130% since past 4 years.
I believe most of us (who are not investment advisors or insurance agents) meet Mr. Mahesh through some friend’s reference. The purpose of this blog is to educate you and think about “HOW MUCH INSURANCE DO I REALLY NEED?”.
Trust me…I have seen my friends crying to pay insurance premium. Rs. 1 Lakh Insurance Premium per year for self and another Rs. 50000 for his/her spouse – Total Rs. 1.50 Lakhs is a common figure since inception of private insurance companies in Indian market.
Let me explain you a basic partition in the insurance products offered today. Type 1 is Insurance only and Type 2 is Insurance + Investment. Any Insurance product offered by any Insurance company must be categorized into above two types. I really love to read names of Insurance Schemes – Jivan Rekha, Jivan Sangharsh, Jivan Paripurnata, Akela Jivan and so on…. However, I would always name any life insurance policy in the world as “Maut Ka Sauda” and Iife insurance company with “Maut Ka Saudagar”. This may sound sarcastic or offending, but I do not intend to assault Insurance Companies. All Insurance companies are doing a useful and a great business of life insurance.
Importantly, in the types referred above, “Insurance” is the common item. Life Insurance means Promise of reimbursement in the case of loss of life (as per a web definition). Therefore, it is the risk of reimbursement undertaken by an Insurance company for your life. Why would they insure you if they can’t make any money of it? It is a source of income for them and a source of expenditure for you. Where Insurance and Investments are coupled in premium, it works out as below.

Assume - Insurance premium quoted for your life is Rs. 10,000 annually. Insurance company takes this sum from you and then distribute your Rs.10,000 as below-
1. Insurance Premium (your cost) – Rs. 2000 and then
2. Balance Rs. 8000 will be invested in the market.
Now, I have personal objection here for coupling your investment with insurance. Why do you need to give Rs. 8000 to insurance company to manage your investment? Can’t you buy stocks, can’t you put 8000 in bank FD?. If yes, then why do you need to walk with liability of Rs.8000 payment to insurance company. I can write with my (virtual here) blood that INSURANCE IS EXPENDITURE FOR YOU. No one in this world will provide insurance free of cost to you.
Having explained concept of insurance business, following are the 4 important factors which may decide how much insurance do you need –
1.Your Life Stage and Your Needs: One need to think about himself/herself before arriving at figure of insurance coverage. For example, your current salary is Rs. 30,000 per month – with average expenses about 20,000 per month. You manage your income-expenditure nicely. Your spouse and other dependants live happily with life standard suitable to your income. In case of any misfortune, your dependants should get at least Rs.20,000 to maintain same standard of living. Same standard of living means same kind of expenditure like one movie in a month, Bata shoes, Lakshmi road for clothing needs etc. Therefore, in this example, your Insurance coverage amount should be enough to yield Rs. 20,000 per month. I know a gentleman earning salary of Rs. 50,000 per month, but insured for Rs. 2 Crore paying some lakh premium every year. He may need to ask question to himself - do his dependents need Rs. 2 crore for survival after his death. Will they start using BMW after his death when they are using Wagon R when he is alive? Of course..NO NO. They only need enough money to sustain. I do not see any reason why you should think of using insurance proceeds for sustaining your son after 21 years of son's age. Your liability should end at his 21 years.
2.Investment: With all high respect to Investment Advisors, I personally hate investment option coupled with Insurance. As said above, I advise not to go for Insurance policy with Insurance +Investment type. Typically, Insurance Agent keep shouting returns of 200% etc. are not fixed returns, but happened due to fast rise of Indian Stock Market since year 2000. If you would have put same money in stock market, you may have earned returns of 300%. Hence, please apply second mind while letting insurance companies to plunge your funds. Investment is a business and Insurance is an emotion. Do not mix emotion with business.
3.Life Standards of your dependents when you leave them: You may need to give a deep thought on life standards you may want to provide your dependants after your death. If your wife dreams of a diamond necklace, please do not plan it with your death and insurance. Your wife needs a diamond necklace along with you. You also need to look at the inheritance you would leave to them and their significant foreseeable expenses.
4.Who are your dependants – This is widely ignored question by most of us. I know a husband who earns Rs. 1 Lakh per month and his wife earns Rs. 1.20 lakh per month. In my opinion, neither of them are dependent on each other. However, assuming their high standard of living, the insurance coverage needs to be equally distributed. Another case – Wife is a housewife. Husband earns Rs. 20,000 per month, but inherits a huge property which earns Rs. 80,000 per month for him through rent. Even if he dies, by law the entire property will rest in the hands of his wife and thus she can continue earning same level of income. In my opinion, even she do not need life insurance.

To sum up –
How much Life Insurance do you really need? –
1. Life Insurance Policy with an appropriate coverage to maintain same standard of living, in case of your sudden misfortune.
2. INSURANCE IS EXPENDITURE FOR YOU (written in virtual blood). Investment is the additional facility offered by Insurance Companies to manage your funds. Where you buy only insurance, such insurance policies are known as "Term Life Insurance" and I always advise to go for the same.
3. Amount of Life Insurance coverage depends on your current life standard. Do not buy life insurance to gift a diamond necklace to your wife after your death.
4. Dependent – Amount and use of Life Insurance proceeds after death are useful only to real dependents.

Disclaimer – The writer of the blog aims to help you out in decision making on buying an insurance product. The views expressed by writer of the blog are his personal views and do not necessarily construed as “Expert Advise”. Anything contained in the blog do not intend to offend any person or any business or any institution. Reader of the blog may apply his own discretion while buying an insurance product or deciding on amount of life insurance coverage for the policy.


  1. Sahi re! I completely agree. Insurrance and Investment are two completely separate things and there is NO need to mix these together. Term Insurrance is the only insurrance one ever needs! Keep it up, Good one!
    -Santosh Gadre

  2. Ambarish..
    Surprisingly you did not mention survival benefit and x time premium received after the end of term..I think thats exactly what insurance agents sell to their clients and this is what is very attractive..
    Seriously who thinks that he is investing because he is going to "die"..all is how much will I have in hand after 20 years..

  3. Thats a really good one from you. Interesting, wrapped in a story of this guy called "Mahesh",its very clear you have given good amount of time and thinking (with very logical/interesting examples)to whatever you have written. Very useful. :)

  4. Life Insurance does not have to be very expensive. Term Life Insurance can be affordable. I got a Term Life Insurance Quote I was happy with.