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Mar 14, 2014, 04.03 PM IST | Source: CNBC-TV18

Right amount of life cover: Dilemma decoded

In an interview to CNBC-TV18, Anil Rego, Right Horizons shared his readings and outlook on insurance and the right amount of cover needed.

Often people face a dilemma on what should be the appropriate amount of life cover. It is very difficult to estimate all potential expenses and then cover them with insurance.

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In an interview to CNBC-TV18, Anil Rego, Right Horizons shared his readings and outlook on insurance and the right amount of cover needed.

He said, 15-20 times your annual income is the commonly used thumb rule for life cover.

Below is the edited transcript of his interview on CNBC-TV18

Q: Is there a thumb rule for insurance because a lot of people are either under-insured or over-insured? How much should one insure oneself?

A: I have seen most people under-insured. A thumb rule that is commonly used is 15-20 times your annual income. The human life value concept tries to put in a formula to that. It tries to replace the earning potential of that individual. The way I look at it is also a little conservative because the person would also have some bit of savings, so you maybe doing more than what you need.

The most accurate way is probably to look at what is the family need in terms of a monthly income. One has to also factor in inflation and then look at the present value of what is the capital required to sustain that type of income. Add to it the various expenses that can come in like children’s education and if you have any loans, then you need to cover them as well. From that you reduce factors like what is your current life cover you already have and possibly what are your current assets. Then you know the gap that you will need to cover yourself for.

Q: It is difficult to estimate all your potential expenses and then cover them with insurance, so is there anything more formulaic that you can suggest?

A: Ideally 15-20 times can be a decent enough thumb rule. The other way of looking at it is, if you were retiring what is the capital that you would require to take care of your own retirement expenses.

Q: Investor had taken an LIC Insurance Policy called Jeevan Anand. The policy term is 73 years and the premium paying term is 21 years. For the first five years investor regularly paid annual premium of Rs 15,000, however in the 7th year she was sent on deputation by her company to the US. So she was unable to make the premium payments from there. It has almost been 6-7 months since her due date. What should she do now?

A: The policy Jeevan Anand is endowment plus whole of life policy and if you do surrender then you will lose out quite a bit in the bargain. So I would suggest maybe she can just continue with it. How do you go about it? Up to six months you can just go and pay the premium with some bit of an interest, but if you crossed six months you may just end up having to go in for a medical if required or maybe a Declaration of Good Health and basically you have to visit the branch and I think it can get easily done. You will have to pay the interest, if required do the medicals and you have your policy alive after that.

Caller Q: I had taken an LIC Insurance Policy called Jeevan Anand. The policy term is 73 years and the premium paying term is 21 years. For the first five years I regularly paid annual premium of Rs 15,000. However, in the 7th year,  I was sent on deputation by her company to the US. So I was unable to make the premium payments from there. It has almost been 6-7 months since her due date. What should she do now?

A: The policy Jeevan Anand is endowment plus whole of life policy and if you do surrender then you will lose out quite a bit in the bargain. I would suggest maybe she can just continue with it. Up to six months you can just go and pay the premium with some bit of an interest, but if you crossed six months you may just end up having to go in for a medical check up or maybe a declaration of good health. Basically you need to visit the branch and it can get easily done. You will have to pay the interest, if required do the medicals and you have your policy after that. 

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