The financial objectives/dreams are clear i.e. one has decided how much one requires at various points in one’s life i.e. on various dates. There are 2 parts to this planning. First is Planning for the present and Second is Planning for the future
. In this article we will deal with Present Planning. Present Planning If Planning for the Present is not done, it will have a huge impact on the family if some untoward event were to happen to the breadwinner. Today most families are not dependant on one breadwinner, husband & wife both are earning. But the loss of one earnings would still impact the family’s expenses. The more one earns, the more is the expenditure. There is also a feeling that instead of paying part of the savings as premium for insurance why not invest the same into better return giving instruments. This is a very erroneous thought. Nothing will happen to me, it will only happen to my neighbors. But we forget we are also somebody’s neighbor. Also if we are alive we can always earn and amass wealth. The amount of premium one pays will be a miniscule portion as compared to the amount of insurance you can get in case of any unforeseen eventuality. It is always better to be prepared than caught unaware. So the question is ‘How much will the family require, if they have to continue their lives in the absence of the breadwinner at the same standard of living that they are used to today?’. Barest minimum could be the Expenses or the monthly household expenses coming to them month on month. This is the Expense method of calculating the amount of insurance the family will require.
The basis behind this theory is that the interest one earns by investing the insurance amount at the current rate would provide the family its monthly expenses. Another method of calculating the amount of insurance would be the income method i.e. around 5-8 times of the annual income earned by the family should be protected so that the family can survive at least 10 years without any inflow of income. The third method is called as Human Life Value i.e. the total earnings of a human life. For e.g. if suppose a 25 year old plans to work till his age of 50 years and his average earnings per annum is 5 lacs, then 25 X 5 i.e.125 lacs is the human life value and the amount of insurance that person should cover himself for. Whatever be the method one adopts, it would be safer to take preventive measures rather than ‘cry over split milk’. The widowed spouse or partly / fully orphaned child will not say ‘I do not want this amount of insurance’ as whole of his / her life is in front of him / her. Nobody can bring back the person but at least the family can have the solace of not coming to the streets or depending on charity. Hence, in summary do take care of your Present-day Planning. The writer can be contacted on email@example.com in case of any clarification or guidance.