All of us know that we must safeguard our future with healthy habits, exercise, good food, and sensible financial planning. Even though medical science is advancing in leaps and bounds, disability, disease and death are always potential threats to mankind. One powerful tool of protection that we have now is "Life Insurance".

Many of us think that life insurance is: 1) A Tax saving tool, 2) A Savings tool - with medium returns, 3) An Investment tool. But not many of us perceive that life insurance is primarily a protection tool - one that provides strong financial safety and stability in case of death, disability or disease.

So let us compare an Insurance plan with any other savings or assets.

Insurance plan	Savings / Assets
Save money every month.	Save money every month.
You get many times over the money that you put in	You get the money that you put in.
Money is accumulated so that it is returned only when it is important	Money is liquid - You can withdraw and spend it whenever you like.
Critical illness occurs: The insurance account has grown by a huge measure. There is no need to borrow.	Critical illness occurs: The account is depleted. You may need to borrow.
Surgery is required: The insurance account takes care of it to a large extent. You are self-reliant.	Surgery is required: The account is depleted. You may need to borrow.
Disability due to accident: The account takes care of protection needs, no need to pay premium; in fact you receive an income each year.	Disability due to accident: The account decreases and keeps on decreasing. You may lose your job and earning power.
Death: The account will grow and be able to provide for your family in time to come.	Death: The account is all that is left for your family. This may get over in a few weeks or months.
The money is there for you - There is no need to sell anything.	If your account is depleted then you may have to: Sell your car Sell your house Sell your shares, units, Sell your jewellery Sell your property Sell your bonds and family investments
You need this account -YES	You need this account - YES

A life insurance policy therefore is just another type of asset - a "protection asset" and does not replace your bank account.

How much protection does an individual need?

The answer to this question is in the form of Human Life Value. Human Life Value is a very powerful tool, which will help calculate the ideal cover required by the individual. To calculate Human Life Value we need to ask these two questions:

A. What is the net take-home of the person, i.e., at the beginning of the month how much money comes in minus all taxes?

B. What is the per month expense of the person on himself / herself - for e.g. travelling cost, clothing, recreation, etc.?

A - B = Contribution to family.

Now if unfortunately something were to happen to this person today then this is the income, (Contribution to family) which the family would be deprived of.

If we assume that a Fixed Deposit is a comparatively secure instrument with secured returns, then, the Sum Insured for a Life Insurance Policy should be that amount which gives you returns equal to the Contribution to family every month when the Fixed Deposit interest rate is applied to it. Let us understand this through an illustration:

Mr. Kumar (28 years) earns an income of Rs. 20,000 per month. His take-home after paying taxes is around Rs. 18,000. Out of this money, Rs. 3,000 is spent on personal expenses. Thus Rs. 15,000 is his Contribution to family. If the prevailing bank deposit rate were 6% (F.D. Rate) then what should be the principal amount, at which 6% would give Rs. 15,000 every month?

Contribution to family per month: 15, 000
Contribution to family per year (multiplied by 12): 15, 000 x 12 = 1,80,000

Let the principal amount be x

6% of x = 1,80,000
x = 1,80,000 x 100/6 = 30,00,000

Therefore Mr. Kumar has a Human Life Value of Rs. 30,00,000 and he should be insured for a similar amount.

Many of us will think that insurance worth Rs.30, 00,000 is beyond the capacity of Mr. Kumar. Insurance worth Rs.30, 00,000 at the age of 28, under a term plan, would attract an annual premium of Rs. 8,408* (Lifeguard Plan from ICICI Prudential). This works out to just Rs. 701 per month, an amount that Mr. Kumar, in all likelihood may be spending on movies and refreshments every month.

It is thus clear that life insurance is extremely low on cost, but the benefit that one can get is immense. If unfortunately Mr. Kumar were to pass away, then his family would get 30 lakhs and with this amount, the family can:

1. Repay a housing loan or any other loan.
2. Invest the amount to get a regular income.
3. Create an education fund for the children.
4. Start a business.
5. Buy a house.
6. Be independent.
7. Not worry about the future.
8. Maintain the investments and assets as they were.
9. No need to liquidate savings.
10. Live the life style that they were used to.
11. So many more things…

And what Mr. Kumar's family will not have to do is:

• Worry about household finances.
• Education and future of children.
• Repayment of loans.
• Deplete their savings.
• Look desperately for other sources of income.
• Depend on relatives and others for their welfare.
• Merely survive.

Insurance provides you with that unique sense of security that no other form of investment can provide. But even so the average life protection amount in our country is merely Rs 1.5 lakhs. As much as 80% of the insurable population in our country does not have insurance, and 80% of those who do, are underinsured.

So while it's fine that you protect your house, cars, savings and investments, it is of utmost importance to protect the person who is the creator of all the above assets - You!