By Prashant Nimgade · Published · Updated
Sarthak is a 30-year-old primary earner for his family of four in Bangalore, earning ₹30 lakh per annum and bearing expenses of ₹18 lakh each year. His insurance advisor has previously said that his family is underinsured. He feels that his family is well covered through the existing Term Insurance policy of ₹1 crore and his employer-provided group life insurance cover of ₹60 lakh.
Still, he and his wife decided to crunch the numbers to find out if his advisor’s claims are true.
Sarthak has to repay a home loan of ₹1 crore and a business loan of ₹40 lakh. His current liquid savings and investments amount to ₹40 lakh. This family also has many unavoidable financial goals: Higher education for their two children after 13 years and 16 years, and retirement in 30 years.
For their calculations, Sarthak and his wife used a shortcut and reached a final corpus value of ₹3 crore. Seeing the coverage gap, they immediately contacted their advisor for an update of their existing term cover.
The insurance advisor was happy to save this family from a possible financial crisis, but he could not agree with their cover requirement. Upon closer inspection, he discovered many misconceptions applied in the insurance cover calculations. The advisor had to lay out the numbers produced side-by-side to show them how grossly they were miscalculating.
He also told them of one method that actually gets this right, called Human Life Value, or HLV. After that, he walked them through exactly why the other shortcuts they had used were about to cost them crores.
Based on this rule, the required cover amount for Sarthak and his family would be:
Sarthak’s cover using the 10×Salary rule = 10× ₹30 lakh = ₹3 crore
Sarthak’s cover using the 15×Salary rule = 15× ₹30 lakh = ₹4.5 crore
This method gives a quick number, but Sarthak has no way of knowing if this output matches his family’s needs or if it is incorrect.
Sarthak’s Cover using the DIME rule, also called the needs-based method:
Total cover needed
= Debts (not home loans) + Income Replacement + Mortgage + Education
Extra cover needed
= Total need − existing assets − existing term cover
Debts = ₹40 lakh
Income Replacement = ₹30 lakh per annum x 20 years (standard assumption) = ₹6 crore
Mortgage = ₹1 crore
Higher Education = ₹60 lakh per child (assumption) x 2 children = ₹1.20 crore
Existing Assets = ₹40 lakh
Existing Term Cover = ₹1 crore + ₹60 lakh
Total cover needed for Sarthak’s family
= ₹40 lakh + ₹6 crore + ₹1 crore + ₹1.20 crore
= ₹8.60 crore
Extra cover needed for Sarthak’s family
= ₹8.60 crore − ₹40 lakh − ₹1.6 crore
= ₹6.60 crore
This output is wildly different from those calculated using the salary multiplier rules. Even though this is more precise, it leaves out major contributing factors from the calculation, specifically inflation, investment returns, or retirement needs.
The DIME method also uses an arbitrary 20 years as the income replacement period, which may be wrongly estimating the needs of Sarthak’s family. Use of 10, 15, or 20 years is a common practice in DIME calculations.
Extra cover needed with:
Income replacement period of 20 years = ₹6.60 crore
Income replacement period of 15 years = ₹5.10 crore
Income replacement period of 10 years = ₹3.60 crore
The reason for this shorthand is the assumption that the family’s reliance on Sarthak’s income may decrease over time. His spouse may return to work, his children may become financially independent in 20 years, loans may be repaid, and investments may generate additional income. However, these are all assumptions. And if Sarthak passes away today, the family would immediately lose the capability to maintain their current livelihood. The automatized choice of the income replacement period glosses over all these realities.
Aside from the term insurance cover, Sarthak also gets group life insurance from his employer covering ₹60 lakh, which is calculated by his company as 2x times his salary.
But even his employer’s cover is not enough. From the DIME calculations, we see that a combined cover of his term insurance of ₹1 crore and his employer’s insurance of ₹60 lakh was still leading to a shortage of ₹5.80 crore for his family. Employer-provided insurance plans are great perks from a workplace, but they are not personalized to the actual needs of a family, just like in Sarthak’s case.
Sarthak could also lose his employer group insurance if he changed or lost his job or took a career break. The cover remains as long as he is employed in this current company. Even after switching to a different company, his cover would not start on his joining date. It will take a few more months based on company policies.
The Human Life Value (HLV) method estimates the economic value of the insured’s future income and their contribution to the family by adjusting for inflation and the actual needs of the family.
HLV asks one question: “if you disappeared tomorrow, how much money would it take to replace what you earn for your family, for as long as you would have earned it?”
This method is most helpful for families with dependents, as it correctly estimates their easily miscalculated costs.
The future income value of the primary earner is calculated on his annual income:
● Excluding his personal consumption and taxes
● Multiplied by his actual remaining working years
● Adjusted for inflation to get a present value
These are all the pointers that are not considered in the previous DIME method.
Additionally, the expenses for Sarthak’s family will not stop at his retirement. So, a separate retirement corpus requirement for his spouse is necessary, as the present value calculation only accounts for needed expenses till retirement. So, a present value calculation of her Retirement corpus is also separately included.
So, for Sarthak’s family, the needed cover using the HLV method is:
HLV = Present Value of future family income + Debts + Future goals + Present Value of Retirement corpus for Spouse − existing financial assets − existing term cover
Assuming Sarthak has a personal consumption of 30%, the remaining 70% supports the family. And, he has 30 years till retirement. The HLV method takes into account the decreasing value of Sarthak’s income with inflation, which is assumed at 4% for this illustration. Additionally, a 10% investment return is also assumed here.
The use of this investment return comes from the assumption that the lump sum insurance payout to the family will not sit idle in a savings account, but will be invested further to grow and gradually support the family. The higher the expected inflation-adjusted return on that corpus, the smaller the lump sum required to replace the insured person's future income, which explains its use.
Net Income Available to Family = ₹30L × 0.70 = ₹21 lakh/year
Present Value of Future Family Income (PV)
= Net Income x {1 − (((1 + Inflation rate) / (1 + Investment return rate)) ^ time till retirement )} / (Investment return rate − Inflation rate)
Present Value of Future Family Income (PV) corpus
= ₹21 lakh/year x {1 − (((1 + 0.04) / (1 + 0.10)) ^ 30)} / (0.10 − 0.04)
= ₹21 lakh/year x 13.5687
= ₹2.849 crore
For retirement, the yearly income needed for his spouse is assumed at 80% of the current need
= ₹21 lakh/year x 80%
= ₹16.8 lakh/year
If Sarthak’s wife needs 4% every year in retirement, then the total retirement corpus needs to be
= ₹16.8 lakh/year / 0.04
= ₹4.2 crore
The present value of the retirement corpus can be calculated using the real return of
= ((1 + 0.10) / (1 + 0.04)) − 1 = 5.769%
The retirement need for Sarthak’s wife will be equal to the present value of retirement corpus
= ₹4.2 crore / {(1 + real return) ^ 30}
= ₹4.2 crore / 5.3799
= ₹78.06 lakh
For Sarthak, the details already provided are:
Debt = ₹40 lakh + ₹1 crore = ₹1.40 crore
Goals / Education = ₹1.20 crore
Existing Financial Assets = ₹40 lakh
Existing Term Cover = ₹1 crore + ₹60 lakh = ₹1.60 crore
Total cover needed using HLV
= ₹2.849 crore + ₹1.40 crore + ₹1.20 crore + ₹78.06 lakh
= ₹6.229 crore
Extra cover needed using HLV
= ₹6.229 crore - ₹40 lakh - ₹1.60 crore
~ ₹4.23 crore
When Sarthak’s insurance advisor had pointed out the misleading math, he had shown this table below to him and his wife.
Sarthak and his wife could now clearly see why their insurance advisor did not agree with their coverage calculations.
● The salary-based rules were severely underestimating the total cover needed, as this method was ignoring the real financial needs of Sarthak’s family.
● The DIME method was overstating the coverage needs, likely due to the choice of the annual income. This method did not exclude the living expenses of Sarthak. The HLV method correctly excludes this from the calculation of the cover needed, as the term insurance payout will be paid only after his demise.
● The DIME method is also highly sensitive to the choice of the replacement period. The needed cover amounts came out to be: ₹6.60 crore (20 years), ₹5.10 crore (15 years), and ₹3.60 crore (10 years). This high sensitivity arising due to an arbitrarily chosen time period makes this method less reliable in matching the financial reality of Sarthak’s family.
● Neither the ₹1 crore term insurance nor his ₹60 lakh employer group insurance were able to cover this family’s expenses, as Sarthak had originally assumed.
Sarthak got immense help from his insurance advisor for re-evaluating the term insurance coverage for his family. He and his family went through multiple steps of doubts and objections that were all resolved by his insurance advisor, with full transparency.
● Sarthak’s advisor did not consider the salary multiplier as the correct estimate for coverage. He got a better calculation of his coverage needs that matched his financial reality: his loans, the needs of his spouse, and his personal goal timelines.
● He was told why certain methods did not work for his family, due to the underlying assumptions involved in their calculations. As was shown to him, the DIME calculation could swing wildly based on the assumptions of replacement time periods used.
● Sarthak’s advisor pointed out that employer insurance plans do not survive a job change. This was an essential point he needed to factor into his coverage timeline.
● He was also confused about what components were counted as financial assets. The advisor showed him clearly that his primary residence may not count as one, but the family jewellery may. He was presented with a complete list of what counted as a financial asset here.
● He needed help with finding realistic numbers for his goals, like the education of his children and the retirement requirements of his wife. His advisor happily verified them for him.
● The comparison of the various available insurance plans did seem very complicated and exhausting. Even more confusing was understanding why the seemingly same plan types were priced differently. His insurance advisor did the hard work and presented his family with plan options that would actually suit them, with all necessary differentiating details, explained plainly.
● Sarthak’s advisor even helped them understand the pros and cons of renewing a plan against buying a new one.
● After all this, Sarthak and his wife did wonder if they were thinking about all this too early. His advisor promptly showed the rising premium costs with the entry age of the insured. Sarthak realised that it was never too early to buy a term insurance policy.
Just like Sarthak’s insurance advisor, SimpliInsure helps policyholders navigate all the small details to calculate the necessary coverage and find the best term insurance policy options that work for your family.
To accomplish the same, Sarthak’s own insurance advisor had requested him to keep these details at hand:
● Annual income
● Time Period of Coverage
● No. of Children
● Outstanding loans and debts
● Existing investments and assets
● Existing life insurance cover
● Expected investment return rate
● Smoker or Non-smoker
Sarthak’s family stayed underinsured not because they did not care, but because they could not find a trustworthy method to choose. SimpliInsure exists to close that gap.
Our advisors run the same HLV calculation, match it to your real debts, goals, and dependants, and present you with a defensible single number instead of confusing you with three different ones. So that you do not end up paying for the wrong coverage and later regret it.
The real question is: do you want to use a shortcut that failed Sarthak, or a precise HLV calculation that becomes the lifesaver for your family? Call SimpliInsure on +91 95133 55661, and get a personalized coverage gap review in 30 minutes.
Disclaimer: This content is for informational purposes only and should not be treated as financial, medical, or insurance advice. Policy terms, exclusions, and benefits vary across insurers. Please review official policy documents and seek professional guidance before making decisions.
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