Is Your Financial Lifestyle Secured?

Is Your Financial Lifestyle Secured?

On the very first day of my classroom session on finance my professor gave us a piece of paper and asked us to write FIVE names who can take care of our family for their life time in our absence? Believe it or not we couldn’t give even one single name… May be why don’t you try to write five names of your family members or friends who can take care of your family for their life time in your absence?

If you have written five names then you can simply ignore reading this articles but for others let me explain.

Many participants and clients asked me is there any calculation to keep the financial lifestyle secured? The answer is YES. . .

While doing a financial planning for yourself, you should predominantly ask two questions to yourself.

  • Who is going to take care of ME and MY FAMILY post MY Retirement?
  • Who is going to take care of MY Family and the outstanding liabilities in my early absence?

Answer to the first question is “Planned Savings” and having proper “Term Life Cover” is the answer to the second question.

In my subsequent articles I will explain the various ways to do savings but here I would like to explain one very simple formula to handle the second question.

Every asset has a value and you insure the asset based on that value but for a human being how do we derive that value? Based on the physical structure … definitely not… It is based on the Income that you earn.

In financial terminology it is called as Human Life Value – there are hundreds of methods to derive value to human life but in this article I would like to explain with one of the simplest method called INCOME REPLACEMENT TOOL to understand the same.

So as you understand that Income plays a key role in calculating the value now it’s important to understand the apt life insurance cover to secure the family. Hence the Income replacement tool says “One should have a minimum of 20 times of the annual income + outstanding liabilities as life cover”.

Let me explain with an example, if Mr.A is earning a salary of 10Lakhs(INR) & has an outstanding home loan of 50Lakhs (INR) then Mr.A should have a life cover of 2.5Crores (INR) because in the absence of Mr.A the nominee would receive 2.5Crs (INR) where the nominee will pay 50Lakhs(INR) towards outstanding home loan and by depositing 2Crs(INR) in any of the traditional deposit which gives 5% average annual return means the nominee receives 10Lakhs(INR) year on year.

Hence to summarize, when Mr.A was alive he was earning 10Lakhs (INR) and his family was enjoying certain lifestyle benefits and when Mr.A is no more still the family continues to receive 10Lakhs (INR) year on year without compromising the lifestyle or the living habits, hence the family is financial lifestyle is completely secured.


Manoj Kumar Alapati

Fellow – III Life, AMFI, AFP


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