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It is said that life is more about risk management rather than exclusion of risk.
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But what is risk?
Risk is the potential of losing something of value that can be either investments, savings, property or life. Success in anything depends on how well we manage our risk. Risk has the potential of taking away everything we have and perhaps more.
While loss in investments, savings and property can be earned back the same is not the case with life. Loss of life, especially of the bread earner of the family can ruin the future of his or her family members.
Providing for risk is a no brainer. The tricky question is how much risk cover should be taken. In a very crude way the question boils down to how much is your life worth, not for you but for your family and those whom you leave behind incase of an eventuality.
How much are you worth?
Value of your life changes at every stage of life. A person just stepping into employment with little or no responsibilities will accord a different value to his life than ones he is married and has children. Thus risk management is a continuous process rather than a one time process. Your worth of your own life changes with every added responsibility.
How do you cover risk and by how much?
Insurance is the best form available to cover life’s risk. The size of insurance cover should be such that the needs of your family members should continue to be met despite your absence. But that is easier said than done.
The size of insurance cover should be such that it should take into account the following factors.
Standard of living: Under ideal condition a person strives to improve his standard of living by saving or taking up higher paying jobs. On a worst case scenario one can plan for an insurance amount that would cover for his present standard of living if not one step higher.
Inflation: Inflation is considered to be the cruelest form of tax and rightly so. Your entire planning of insurance can go for a toss if inflation is not considered. A persons entire cost of education 25 years back is equivalent to one year’s fee of their ward in a metropolitan city today. Future planning just has to be taken considering inflation.
Liabilities: The worst way a person can punish his or her family member is to leave the world without paying or providing for the bills or mortgages. All mortgage payments need to be covered so that the burden does not fall on the family.
Educational expenses: Education fees are moving much faster than inflation and would be difficult to predict. But by flagging the expense at current prices and providing an aggressive multiplier to inflation one can arrive at a tentative figure.
At this stage we would like to invite suggestions from our readers on what else needs to be considered for arriving at an insurance amount.
We would be happy to append your suggestions in continuation with this article.
