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    Do you have enough insurance? Use this thumb rule to find out

    Synopsis

    Like all other aspects of financial planning, the key question is how much insurance is enough.

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    By Ajit Menon

    The most important question to address while creating a financial plan is that if something untoward was to happen to an earning member of the family what happens to the goals, aspirations of the family and who takes care of the liabilities like home loan? Can an individual create a big enough safety net for their near and dear ones? Leaving this to hope is not the answer; instead the answer to this is having adequate insurance cover.

    It is often debated whether one should invest in mutual funds or opt for insurance policies. In my opinion it is not an either or option, both products are required to create a comprehensive financial plan including other asset classes like gold, real estate, and creating a will. What you should know is that mutual funds are investment vehicles whereas insurance products cover risk and have to be used accordingly.

    How much insurance cover should you have?
    Like all other aspects of financial planning, the key question is how much insurance is enough?

    Some of the factors to consider while arriving at the appropriate insurance cover are:
    • Current annual income: Objective is to have an amount of cover adequate enough to help generate income equal to replace the annual income.
    • Financial liabilities: This should include current liabilities like home loans, car loans. Any deferred payments also need to be considered.
    • Financial goals: Like children's education, marriage etc
    • Life stage of the person: A person in the mid stage with liabilities, responsibilities would need a higher cover as opposed to a person at a later stage in the life cycle, whose responsibilities and liabilities have been taken care of.

    In arriving at the number, one needs to deduct the corpus one has in the form of investments and savings by way
    of mutual funds, bank fixed deposits (FDs) etc.

    Follow this thumb rule
    It may look like a complex mathematical problem to solve, but thankfully thumb rules come in handy here as well. In developed economies, the thumb rule is that one needs to have an insurance cover equivalent of 7 to 10 times of annual income. Experts believe that in an economy like India, where inflation could be higher than developed economies, it is better to have a cover equivalent of 10 to 15 times the annual income plus the outstanding liabilities.

    For example, if a person has an annual income of Rs 5 lakh, then the adequate insurance cover would be anywhere between Rs 50 lakh and Rs 75 lakh plus liabilities, if any.

    Obviously, the insurance premium has to be paid every year and hence, it is important to give weight age to one's ability to
    pay the premium year on year, while deciding on the extent of insurance cover.

    Thumb rules are just guiding principles, and it is advisable to have a good advisor or financial planner who can customise the financial plan to your goals, aspirations and circumstances. Do keep investing in mutual funds for financial goals but don't forget to buy adequate insurance as well.

    (The author is CEO, PGIM India Mutual Fund.)
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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    (Your legal guide on estate planning, inheritance, will and more.)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    ...more
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