Is it enough to insure only breadwinner of the family?

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THE primary intent of buying a life insurance is to protect the financial needs of one's dependent family, in case of an untimely death. The amount of insurance required should be enough to compensate the monetary or economic loss that the family would incur post the breadwinner's death.

The amount of economic loss is equal to the economic value of all those who contribute to the family income. It could be defined as the amount that the family would require to retain the same standard of living in the absence of the earning member.

In case of a single income family, let us assume that a person has a monthly income of Rs 20,000 and the net income provided to the family post deducting personal expenses is Rs 18,000. Thus the annual income provided to the family is Rs 2,16,000. To generate Rs 2,16,000 annually, the corpus required will be Rs 36,00,000, assuming that this corpus is put in a fixed deposit that will give an annual return of 6 per cent.

So, ideally the person should have at least a life cover equal to Rs 36,00,000 as on date, which needs to be reviewed periodically.

In the case of a double income family, let us suppose that the husband's monthly income is Rs 15,000 and his wife's monthly income is Rs 12,000. Post deducting their personal expenses, they collectively contribute Rs 20,000 per month to family's expenses, that is, Rs 24,0000 annually.

In such a scenario, the family needs to protect both the incomes to the level they provide for to the family's expenses.

Hence a life cover for both the spouses is required.

If something unexpected happens to the breadwinner, the family will require a large amount of money to replace the income that breadwinner was providing. The same logic is applicable for a housewife who is often the most under appreciated person in the household.

Even though a housewife may not be directly contributing to the family income, the housewife saves family income by providing services such as managing the household and looking after children and/or aged parents free-of-cost. All these efforts also have a monetary value, especially if you were to replace it, by hiring paid services of similar nature. Many of the services might not even be replaceable.

So one can calculate the human life value or replacement value of a housewife also by estimating the costs that one would incur for cooking, house maintenance, caretaker for children or parents and tuition.

Another way, as suggested by financial planners, to do a valuation of a homemaker is based on the "opportunity cost".

Opportunity loss means the loss incurred by quitting a job or appointing someone to look after the home. In certain cases, a working spouse might want to take some time off to look after the family, post the homemaker's death. This period often ranges from 18 months to 2 years and is known as the `readjustment period'.

During the readjustment period, the income of the family needs to be replaced and adequate life insurance is one of the ways to provide for it. The readjustment period can be applicable for any couple immaterial of whether earning or not.

However, we need to remember that life insurance can only fill the economic void, the emotional loss is irreplaceable. Life Insurance ensures that the emotional loss is not compounded by the financial loss.

Happy Investing!!

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