Insurance is basically a mechanism to reduce risk by pooling it. It stems from a basic theorem in statistics - which is also apparent via common sense - that diversification reduces risk.
The numbers I have put in above are fairly representative. Premium per lakh of insurance comes to around Rs 80-100 per year. This of course assumes that the insurance is pure insurance (also called term life) and is purchased online so as to save on agent commission.
Typically one should first cover large debts like house loan and next look at large responsibilities. In the Indian context, these would include child education and marriage. Next, it must have enough funds for the remaining life of the dependents. A good rule of thumb for the last item is to have 25 times the annual household expenses.
In most Indian contexts, the monthly expenses and savings for children would come to somewhere around 50% of the monthly take home. Home loans should not be more than 3-5 times the annual take home. So total insurance would come to around 16 times the annual take home which results in a premium that is 1% of the monthly pay. In the absence of a home loan or in case where the home loan is already insured (as is often the case), the premium would come to 0.6% of the monthly take home.
How it works
The life expectancy in India is reasonably high (over 65 years of age). Very few people die in their late thirties or early forties - mostly due to accidents. Their numbers may be some 5 to 10 in a thousand - let us assume that it is 1% for the twenty year between 30 and 49. Unfortunately, the families suffer a huge financial burden in these rare cases. Life insurance basically works when a large number of people agree to pool a small amount of money every year with the understanding that in case someone dies their families will receive 2000 times the money they put in.The numbers I have put in above are fairly representative. Premium per lakh of insurance comes to around Rs 80-100 per year. This of course assumes that the insurance is pure insurance (also called term life) and is purchased online so as to save on agent commission.
How much insurance does one need
There are various mechanisms to calculate the requirement of life insurance. Please keep in mind that insurance is NOT a full replacement of the income that a person would have earned. Instead it should be considered as a replacement for the cash that would flow from the person being insured to others.Typically one should first cover large debts like house loan and next look at large responsibilities. In the Indian context, these would include child education and marriage. Next, it must have enough funds for the remaining life of the dependents. A good rule of thumb for the last item is to have 25 times the annual household expenses.
In most Indian contexts, the monthly expenses and savings for children would come to somewhere around 50% of the monthly take home. Home loans should not be more than 3-5 times the annual take home. So total insurance would come to around 16 times the annual take home which results in a premium that is 1% of the monthly pay. In the absence of a home loan or in case where the home loan is already insured (as is often the case), the premium would come to 0.6% of the monthly take home.
Summary
The following rules of thumb can be used as starting points- Always purchase term life insurance and never traditional plan
- Insurance is required once you have a family and typically till the age of 50; do not buy insurance for longer periods
- Purchase insurance online after comparing rates
- Typical premium amount should be 0.5 - 1% of your income; it the premiums come much higher or lower, you are probably making some mistake in calculating your insurance needs.
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