INSURANCE CASE STUDIES 
Facts
Mr. Chintamani is a young newly married software engineer, working with an MNC now for past 4 years, earning INR 6.50 lacs. He has one dependent, his wife. He has, as of now, Insurance of INR 4,00,000. He is investing his savings in mutual funds regularly and has a portfolio of INR 3.75 lacs in mutual funds and INR 2 lacs in bank FD. He has an auto loan which will be complete after 5 years. His monthly expenses come around INR 28,000 (inclusive of the auto loan EMIs).
Diagnosis
Mr. Chintamani is not optimally insured. On the event of his death, his spouse will need some money to survive with the current lifestyle. It is very important for Mr. Chintamani to insure himself optimally as Mrs. Chintamani is dependent on him. Mrs. Chintamani might as well have to take care of their children in near future.
We will have to assess the need of insurance for Mr. Chintamani. Insurance can not be calculated as a percentage/multiple of ones income. Insurance is a very much need based so should be calculated as per the needs of Mrs. Chintamani on such an event. Insurance need can be calculated by calculating human life value (HLV). HLV can be calculated by two methods, namely:
- Need based approach
- Income replacement method.
We shall take the first approach as it is more appropriate to calculate the needs.
Recommendation
Mr. Chintamani needs additional basic insurance to be optimally insured to take care of his wife's needs in the event of his death. His total insurance needs according to the need based HLV approach is of INR 52.5 lacs. So he needs an additional insurance of INR 48.5 lacs. The amount has been calculated at decent interest rate of 8% and inflation rate of 3.5% has been taken in to consideration. Final calculation has been done with inflation adjusted rate of 3.62%. To calculate the need of insurance, his monthly expenses is taken in to account and also an emergency fund been created along with taking care of the final cost.
| | Amount |
| Total Expenses (Today) | 28,000 |
| Corpus for Expenses | 51,16,674.5 |
| Emergency Fund | 84,000 |
| Final Cost | 20,000 |
| Total Insurance required | 52,48,674.5 |
| Insured for | 4,00,000 |
| Insurance Required | 48,48,674.5 |
Mr. Chintamani needs the above insurance which he can take term plan. However, for tax purpose or for a blend of savings and insurance he can partially also take an endowment plan.
Conclusion
Mr. Chintamani is heavily underinsured. Now, as he has got married recently, his insurance needs have drastically increased. It is recommended that he gets optimally insured as soon as possible. He can take insurance in bits also if he thinks he cannot pay such a heavy premium now.
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