Life Insurance Planning

The basic purpose of Life Insurance is to create Cash. By paying only one premium you can create an estate for your family. Once someone said that in other savings and investments there is ‘IF’ concept, e.g. consider a recurring deposit, IF you pay Rs. 10000/- p.m. for 60 months, IF interest rate is 9%, IF you pay for full term, then only you shall get Rs. 759898. But in case of Life Insurance you simply pay a premium and you are covered. So other investments are based on IF but Life Insurance is based on the concept of SURE.

None of us like to think about death. But being mortal human being, death is certain though the time of death is uncertain.  We call it – insure your uncertain time. Your health (not money) buys insurance and money (premium) continues your insurance. So only when you are physically and mentally fit, then only you can buy insurance. Procrastination is a common phenomenon especially in case of insurance. Most people think that they don’t do anything wrong, but they fail to realise is that not doing anything at right time is itself wrong.

What is Capital Need Analysis?

Capital Need Analysis (CNA) is often used by financial planners or insurance agents. Some financial planners or insurance agents may calculate Human Life Value (HLV) for insurance planning. But we are going to discuss about CNA to understand the concept.

Features & Benefits of Capital Need Analysis (CNA)

Capital is preserved instead of being liquidated. We all are aware of inflation and CNA helps to offset inflation. A family always looks for inflation-proof estate and thus the family can increase its income even after the death of a breadwinner.

Financial planners always remind you that you have four type assets:

  1. Personal Assets: Such as Residential Home, Car and jewellery etc.
  2. Business Assets: Such as Company sponsored group insurance, partnership insurance, retirement plans and ownership in a business.
  3. Real Assets: Such as Physical properties (Land, building, precious metal etc).
  4. Financial Assets: Life Insurance, Fixed Deposits, Equity, Bank Savings etc.
Your estate means  everything you own which includes real property (houses and land), tangible personal property (furniture, jewelry, and automobiles), and personal financial assets(stocks, bonds, and bank accounts). The estate also may include such intangible items as proceeds of life insurance policies and other benefits under(Employee Benefits) gratuity,  pension plans. All of these various means are considered  as your assets/ property. After death all assets are transferred to your beneficiary/beneficiaries. Your estate can pass through like a funnel. Most people believe that what passes through funnel goes to beneficiary/beneficiaries. Not at all true, just consider the funnel.

Life Insurance Planning

There are silent partners who claim shares before our families. Unfortunately 10% to 30% (even more) may be siphoned for Taxes, Probate fees, Appraisal fees, Legal Accounting fees, Administrative fees, Debts, Medical Expenses & Funeral Costs etc and residual may go to your beneficiaries. Is left over enough for your family?

Why Capital Need Analysis?

It’s obvious that a financial Planner wants to see whether the bottom of funnel can generate adequate income in the event of breadwinner’s death/disablement or not. There is a role of a financial planner to minimize the amount of silent partners’ share or makes such a provision so the beneficiary/beneficiaries never outlive his /her assets.

How much life insurance do you need?

The monthly income that your survivors need should be the ideal insurance cover. We may say the bills your spouse needs to pay: household expenses, life style expenses, education, childcare, transportation, insurance etc. Also, consider if your spouse have any other source of income.

Inflation ?

You need to consider inflation which is a silent killer, capital preservation for your survivors is very important. Otherwise entire capital will be eroded within few years. Most of you are having life insurance but few have only protected your capital against inflation. It happened to a family, whose widow got Rs. 8.5 lakhs as claim after her husband’s death. The family needed Rs. 120000 p.a. as expenses and inflation is 7.5%, and the widow invested the claim amount in debt fund from where she used to withdraw through SWP(systematic withdrawal plan), and the return from debt fund is 8%. See how the family suffers due to poor insurance planning!

Age of wife

Opening Balance

SWP

Closing Balance

Yrs

Rs.

Rs.

Rs.

32

850000

120000

788400

33

788400

129000

712152

34

712152

138675

619355.2

35

619355.2

149075.6

507901.9

36

507901.9

160256.3

375457.2

37

375457.2

172275.5

219436.3

38

219436.3

185196.2

36979.29

39

36979.29

199085.9

-175075

Can you imagine on 8th year the spouse had no money to survive? The average age of longevity may be 80 years, so she would live another 48 yrs (80-32), considering inflation her husband could have had a minimun term plan for Rs. 51, 76,000, so that the unfortunate widow would not run out of money.

Two ways to offset inflation: Man at Work: While we work, our earned income keeps pace with inflation. Money at Work: When we retire from the world or work, we must keep such a provision through proper financial planning that our adequate invested corpus hedges inflation. Can Income keep Pace? Most of the cases unproductive consumers have to use both the principal amount and the interest portion due to skyrocketing inflation. Assume if your investment earns 8% and the annual inflation rate is 7.5%

To conclude, inflation adjusted return is 0.4651%, which means if a family uses both the components (principal+interest), the breadwinner may need a coverage of Rs. 51.76 Lakhs. On the other hand if a family uses only interest (return on investment), the breadwinner may need a coverage of Rs. 2.58 Crores. Better to go for instead of Rs. 51.76 lakhs. The slogan is “the least for the most”, which means pay minimum and get maximum.