Chai-call last week. Friend's question sounded simple. The math said his family runs out in year nine.
"Is my Rs 2 crore term cover enough? Salary Rs 25 lakh. Brochure said ten times income. Did I get this right?" Asked him to send the policy schedule. Opened a calculator. Ran the human capital math on a napkin while the chai went cold. The rule said yes. The math said the family runs through the corpus by year nine. The number on the cheque is not the number on the brochure.
2.5cr
10x income . brochure rule
The shelf number. Lazy. Convenient. Almost always wrong in the same direction on a 30 to 40 year old earner with dependents.
6.5cr
Human capital PV . the real number
Present value of 25 years of earnings the family loses the day you do not come home. Salary growth 8 pct. Discount 7 pct. The math the brochure skipped.
4.0cr
Gap . what the rule under-buys
The rupees the family never sees because the rule sized to a multiple of last year's payslip instead of the present value of the next 25.
The rule is a shelf number. Human capital is your number. Card two is the math behind the Rs 6.5 cr line and the part that breaks the brain on first hearing . the premium gap between Rs 2.5 cr and Rs 6.5 cr is the cost of two filter coffees a day.