"Does my family really need Rs 2 crore on my death?"

When I suggested Rs 2 crore as sum assured for a customer, this was his immediate reaction. Typical of us, I thought. When a sales person gives us a product/scheme our first thought goes to the 'commission' he or she makes. I keep wondering why.

Even our vegetable vendor has to assure us that the last rupee that we try to squeeze out of him is what he makes. It makes us feel happy. We completely forget that we need tomatoes, which we can afford, and which we like. Why should it be our concern how much he makes?

So, I set out to tell the client the following:

We buy life insurance to replace income lost due to the death of the breadwinner. The amount of life insurance you need depends on the 'income stream' you would want to continue for your family if anything happened to you.

Let's say you earn Rs 800,000 a year. This money provides your family's lifestyle and standard of living. As long as you are alive and well, your loved ones will remain financially secure.

What happens when the breadwinner (read 'You') are no longer able to earn this money? Bluntly, if you died tonight, what would your family do? How would they pay the home loan EMI, car loan, society charges, utilities, taxes and other bills? Where would the money come from for new clothes for your children, for college fees, or even for your spouse to enjoy an evening out with friends?

Very few people are comfortable answering this question. They live like they will never die and most will die like they never lived. When you have lived a good life, and have a family that you 'love,' your answers have to be far, far better than these.

That's why we buy life insurance. So that the answer to that question is, without hesitation or doubt: "They'll be provided for."

How much life insurance do you need? The chart below shows the annual income the insurance proceeds can generate based on the following assumptions: The beginning amount will earn a 5% return after taxes, with principal and interest depleted in 20 years by withdrawing an amount equal to 8% of the original principal every year.

Note that different assumptions will generate different results.

Example: A life insurance death benefit of Rs 10,000,000 would provide your family with an income stream of Rs 800,000 a year for a 20-year period, after which the entire amount would be depleted. So, if you earn Rs 800,000 a year, you may wish to consider Rs 10,000,000 of life insurance.

How expensive is that? That depends on a number of factors, including your age, health and personal habits (such as whether or not you smoke), and type of insurance.

You have several insurance options, depending on need, budget and situation:

Term life insurance provides pure death benefit protection, generally for the smallest cost. It is ideal for the person who needs a high amount of coverage but cannot afford endowment for now.

Endowment policies can provide lifelong protection for a fixed, level premium. Additionally, it combines death benefit with cash value accumulation. However, the initial cost is generally higher than for a comparable amount of term life insurance.

You can have both!

Let me tell you what my customer did. Without worrying too much about the premium he took a term insurance policy of Rs 2 crore about 4 years back from the cheapest source. Every year he has been adding Rs 5 lakh of endowment policies -- a nice way to keep up with the inflation, and the fact that the booming economy has taken his income from earth to stratosphere he is more inclined to save.

Contrary to his first reaction his wife and children wouldn't be rich. However, they would be able to continue to enjoy the financial security and standard of living he has worked so hard to build for them.

Life insurance can replace income lost due to the death of an income earner. It is a cost-effective way to make sure your dreams are completed if you die and are unable to complete them yourself. You may not need Rs 2 crore of life insurance. You may need less. You may need more. The important thing is to make sure you have the amount that's right for you.

Remember your dreams are joint dreams. Do not leave your spouse to fend for herself. Give her the confidence to tell the kids, "Papa has become a star, but nothing will change for us." Give conviction to her voice.

Let the 6th birthday be at the same hotel as the 5th birthday. Let the interior decorator be told, yes the plans remain the same. Let the kids dream of an Ivy League education. Let the father, father-in-law, and brother-in-law not decide where your wife should stay.

Let not the kids who lost one parent to fate lose the other parent to a full-time job. Simple, insurance is not because you will die. It is because they will live.

We in the financial planning industry cannot protect lives. We try to protect lifestyles. The odds favour us over doctors who try to protect lives.

The author, P V Subramanyam is a financial domain trainer and can be contacted at pvsubramanyam@gmail.com.

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