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By:

Kaustubh Kale

10 September 2024 at 11:37:15 pm

Income Replacement Through Life Insurance

One of the most common questions in financial planning is: how much term life insurance should a person actually have? You may hear rules such as 10 times or 15 times annual income. While these thumb rules are a good starting point, a simple Excel sheet can help you understand the actual requirement better. The basic purpose of term insurance is income replacement. If the earning member of a family dies, the family loses not just today’s salary, but the income that person could potentially...

Income Replacement Through Life Insurance

One of the most common questions in financial planning is: how much term life insurance should a person actually have? You may hear rules such as 10 times or 15 times annual income. While these thumb rules are a good starting point, a simple Excel sheet can help you understand the actual requirement better. The basic purpose of term insurance is income replacement. If the earning member of a family dies, the family loses not just today’s salary, but the income that person could potentially have earned over the remaining working years. That future income would have supported the family’s lifestyle, regular household expenses and long-term goals such as children’s education and marriage. Start With Four Inputs Open an Excel sheet and enter four basic assumptions: your present age, your current annual income, your expected annual increment and the age up to which you expect to work. Suppose a 30-year-old earns Rs 10 lakh per year and expects to work until age 55. Assume the income rises by 6 per cent every year. In the first row, enter Rs 10 lakh. In the next row, multiply the previous year’s income by 1.06. The following year, repeat the same formula and drag it down until age 55. Thus, Rs 10 lakh becomes Rs 10.60 lakh in the next year, then approximately Rs 11.24 lakh in the year after that, and so on. When all these projected annual incomes are added together, the total is about Rs 5.9 crore. See the Bigger Picture That is the interesting part. A salary of Rs 10 lakh may not sound enormous when viewed for just one year. But when you look at the earning potential over the next 25-odd years, the number suddenly becomes close to Rs 6 crore. This is the income stream your family is financially dependent on. The result also changes substantially when the assumptions change. If annual income growth is 8per cent instead of 6 per cent, the projected cumulative income rises to approximately Rs 8 crore. Similarly, a younger person with more working years ahead may have an even larger amount of future income to protect. Use Excel to Get Perspective This is why merely choosing an arbitrary Rs 50 lakh, Rs 1 crore or Rs 2 crore cover because the number sounds large may not tell the full story. Even the commonly used 10-15 times income rule is just a starting point and may not be sufficient. Excel makes the magnitude of your future earning capacity visible. Of course, this calculation need not be treated as a rigid formula or an instruction to buy exactly the amount that appears on the screen. Its purpose is to give you perspective. Term insurance is ultimately about replacing the earning capacity your family could lose if you were no longer around. Put your own numbers into a spreadsheet and project your income year by year. You may be surprised at how much you are actually expected to earn over your working life - and therefore how much financial protection your family may truly need. (The author is a Chartered Accountant and CFA (USA). Financial Advisor. Views personal. He could be reached on 9833133605.)

Bad Roads, Ugly Politics


The pathetic state of roads in Mumbai city as well as its suburbs has made daily commute a dangerous affair. The residents are miffed with the BMC over its lackadaisical attitude. Mumbaikars tweet photos, post videos to grab attention, but everything is in vain. Who cares for the common people. Backbreaking journeys have become part and parcel of life. Political leaders are busy mud-slinging.


This year the monsoon took a break after almost four and half months. During this time some of the roads virtually became non commutable. It may be recalled that the Chief Minister Eknath Shinde first announced to make Mumbai roads pothole free.


Its almost two years now the BMC has concretised only 9 percent of roads it planned to concretise. This decision was taken when it came to light that due to the properties of bitumen in asphalt roads, potholes are a regular occurrence due to contact with water during monsoons.


Hence, to solve the problem of potholes, the corporation has adopted a policy of cement concreting of 6-meter-wide roads in phases. The decision was taken but the dilly-dallying affair made things more difficult.


Mumbai’s traffic does put a lot of strain on roads which is not the case in the other developed countries. Second most important aspect is concretisation of roads is done partly and in phases.


The worst problem which is faced is repeated digging for cables and drainage, which weakens the roads. Above all corruption in BMC makes matters worse as a result everything comes to grinding halt.


According to experts, repairing potholes is a reaction with symptomatic treatment. By and large we are dispensing superficial treatment without addressing the root cause. The long-term solution will be to have roads with no potholes but what we need is the means and technology to achieve this. But for this political will is necessary which we lack on every step.


Mumbaikar’s are convience that corruption in the municipal corporation is the main reason. Contractors have had a monopoly over the last 20 years and this is the reason why reputed companies never come ahead for these projects.


As a result, in the name of attendance and repair, the BMC does shoddy work. Crores are spent but the end result is nothing. The BMC is not paying attention to the crust. If the crust is weak, potholes will see an increase. Without any thought or technical know-how, potholes are filled with cold mix.


This is the reason why the city and suburbs continue to have craters on the roads.


Craters, a serious threat to the safety and security of people. Mumbaikars fade up from their repeated visits to orthopedic surgeons.


They are in a mood to teach a proper lesson to those who were at the helm of the affairs.

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