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Insurance & Retirement Planning

Methods to calculate Insurance requirement

Income Replacement Value Human Life Value Need Analysis

Income Replacement Value

Insurance needs = annual income * number of years left for retirement. Let's say your annual income is Rs 5,00,000. And you are 45 years old with 15 more years for retirement. In this case your insurance cover equals Rs 5,00,000 * 15 = Rs 75,00,000. Another way in which income replacement works is to multiply the annual income by 10 (also known as Income Replacement Multiplier). Another variant states that the Income Replacement Multiplier changes with age. So between the ages of 20-30 years, the income multiplier is 5-10, and from 30 to 40, the income multiplier is 15-20.

Human life value

So HLV is defined as the present value of all future income that you could expect to earn for your family's benefit. It also includes other value you expect to contribute, less personal expenses, life insurance premiums and taxes through your planned retirement date. Ram is 40 years old and plans to retire at 60. His current salary is Rs 3 lakhs and is expected to remain same every year. His personal expenses, life insurance premiums that he pays and taxes are around Rs 1.25 lakhs. His contribution to his family is rest of his salary of around Rs 1.75 lakhs. If this surplus income is capitalised at a discount rate (expected return rate) of 8 per cent per annum for 20 years, then the HLV will be = Rs 175,000*10.6 = Rs 18.55 lakhs.

Need analysis
In this method, you can assess your needs -- and the needs of your loved ones -- and make a calculated assessment. The most critical factors are the number of dependents you have and their needs. Other major factors to consider are:
Loans Kind of lifestyle you want to provide to your family Provision for non-working spouse who would no longer get an income Child's education Child's marriage Providing for financially dependent parents Special needs Dreams and aspirations such as contributing to charitable causes

Contd
Once you determine the above factors, you run the following calculations: 1. Lump sum needs on Life to be Insured's death a. Home loan payoff b. Car loan payoff c. Child's education d. Child's marriage e. Emergency fund post death 2. Monthly income needs a. Monthly expenses b. Income of Living spouse in case she earns, or rent or interest c. Shortfall = (a-b) d. Shortfall is a-b. Suppose, expenses are Rs 50,000 and spouse's income is Rs 30,000 post tax, then shortfall is Rs 20,000 (50,000-30,000).

Retirement Planning

Your Hopes and Dreams for Retirement

Retirement is closer than you think.

Whats on your wish list? Perhaps travel, a vacation home, or education?

Your desired lifestyle will determine your income need.

How Much Is Enough?

Experts say you may need 60% to 80% of your final working years salary each year during retirement.

Conservative Mix
Conservative

Bonds

Average Annual Rate of Return 8.45%* 20% money market instruments, 50% bonds, 30% stocks

Stocks

Money Market Instruments

Past performance cannot guarantee future results. *All figures represent performance for the 30-year period ended December 31, 2012. Stocks are represented by the annual total returns of the S&P 500, bonds are represented by the Barclays U.S. Aggregate Bond Index, and money market instruments are represented by the Barclays 3-Month Treasury Bill Index. This illustration is not intended to represent the past or future performance of any specific investment. Asset allocation does not ensure a profit or protect against a loss.

Moderate Mix
Moderate
Average Annual Rate of Return 9.66%* 10% money market instruments, 30% bonds, 60% stocks
Stocks

60%

30% 10%
Money Market Instruments Bonds

Past performance cannot guarantee future results. *All figures represent performance for the 30-year period ended December 31, 2012. Stocks are represented by the annual total returns of the S&P 500, bonds are represented by the Barclays U.S. Aggregate Bond Index, and money market instruments are represented by the Barclays 3-Month Treasury Bill Index. This illustration is not intended to represent the past or future performance of any specific investment. Asset allocation does not ensure a profit or protect against a loss.