In my last post about how much insurance you need – I wrote about my thoughts on how you could go about calculating your life insurance needs, and both Sumant and Hema brought out a significant limitation with the way I went about the calculation.

I was taking into account the annual expenses, expected rate of return from investment and liquid assets, but ignored liabilities completely. For someone who has taken a home loan for 15 lacs that their spouse or parent will be responsible for – that’s a pretty big miss.

Thanks to both of you for pointing that out, and I thought I’d try my hand at making a small little life insurance calculator that will take into account all these things, and then calculate a number for you.

You will need to input the annual expenses that your family will incur, input the liabilities that they will have to pay off, enter a rate at which you expect them to invest this money like 8% if you’re thinking bank FDs, enter assets that they can en-cash, and this calculator will then calculate an apt cover for you.

The way this works is that it will take the annual expense, and use the expected rate of return to see how much capital you should have to generate that much money annually. Then it will add the liability number to that, and subtract the asset number from it.

Here is the calculator – play with it and let me know what you think.

Annual Expense | |

Outstanding Loan | |

Expected Return in % | |

Liquid Assets |

Insurance Needed

As always – feedback from you smart people is welcome, and thanks to Sumant and Hema again!

{ 9 comments… read them below or add one }

Actually , may I suggest a small correction ? The amount calculated as the capital needed can be slightly less , if we take the annuity route. That is at the end of a specified period ( when the dependents cease to be dependent on you , whatever that means ) the capital and the interest on that will be zero. This way the dependents will be using the interest and a part of the capital each year and thus this will result in a smaller figure for insurance needed.

I wouldn’t go this route for the following three reasons:

1. This method doesn’t take into account escalating costs due to inflation or some other event like kids growing up etc. so it’s better to take a snapshot of your current situation, and not tinker too much with it. In this way you might even have a little money left after the returns from investment which can then be used to pay off higher expenses in the future.

2. Taking out part of your capital is good for calculating retirement expenses, and I think the 4% withdrawal rate is fine there too because most of your big expenses are hopefully past you, and you only need that for your own expenses for a few years. This is different in the sense that the time remaining might be a large number of years, and there could be some big expenses on the horizon which can’t be ignored.

3. I’ve still to come across a really great annuity product – but that could be just because I’ve not looked hard enough.

btw, there is some insurance that covers for your home loan emis at a better cost than use up your life insurance for.. I think cos like National Insurance do provide for that. I think it is better to go for those to cover for the liabilities and leave life insurance just for the other things in life than pay for liabilities. Any thoughts?

I don’t know how the cost of that fares so can’t say with certainty, but if you’re going that way then another way to look at it is to say that right EMIs are part of monthly expenses, and including EMIs the expense is 40K, so how can I build capital that returns 40K per month.

Nice tool!

Manshu is inflation considered in this calculation?

No buddy it doesn’t. Couldn’t think of a way to incorporate it. Any suggestions?

well , you can provide the user with an additional box to estimate the inflation and then subtract it from the expected rate of return .

Thanks for the suggestion – I’m not sure how I’ll account for how long to calculate the number for like 20 or 30 years or what, and I’m not certain there is a way to do that. It comes back to the thing I said about the retirement calc I guess.

Are you using TVM functions in this calculations?