The initial step involves determining the current value of the income needed for the survivor. The subsequent step is to calculate the corpus required to generate this income. For this calculation, the applicable rate is adjusted for inflation.
The value of existing investments is subtracted to establish the corpus that needs to be created, which represents the insurance amount.
Let’s say the current income of a household is Rs 50 lakhs. Current age group is 49 years and life expectancy 80 years.
Steps for Calculation:
Calculate the current value of the income needed.
Total income - (EMI payments + Insurance Premium)
= Rs. 50,00,000 - 0
= Rs. 50,00,000 per annum
Determine the applicable rate after adjusting for inflation and investment returns.
Inflation rate = 6%
Investment rate = 10%
Adjusted rate = ((1 + 10%) / (1 + 6%)) - 1 = 3.77%
Utilize the PV function in Excel to calculate the corpus.
Rate is the adjusted rate of 3.77%
Nper is the number of years the income needs to be provided; in this case, it is 31 years (80 years - 49 years).
PMT is the income that needs to be provided, starting at Rs. 50,00,000
The calculated value is the corpus that will generate the required income when invested at an 10% rate, totalling Rs. 9 crores.
4. To the calculated corpus value, any outstanding loan need to be added.
5. From the total required amount, you must deduct any existing insurance cover.
Once you establish the insurance requirements, evaluate options that do not involve an agent or any intermediary. Keep in mind that an insurance policy is a contract, and any brokerage payout to agents will last for the entire duration of the policy.
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