How Much Life Insurance You Need?

Sipping your morning tea and going through the news, we get astonished reading the world news. The news is filled with uncertain bad events that we pray should not occur to us. We give our usual sympathetic feel reading the sad news and start our day’s work. Very few times we actually take a moment to do analysis and evaluation of our own life contingency plans. This article will help you with exactly how much life insurance should you carry if ever any tragedy strikes you.

Life Insurance Introduction

Life insurance pays out agreed sum assured on the death of the policyholder if death occurs during the specific coverage term. The death of the family member will leave the family devastated if he or she is the bread winner, it will completely destroy their lives and the dependents might struggle to meet daily needs. Having a life insurance plan is possibly the best defense you and your family can own to face the uncertain events in life. Life insurance products come in different forms such as term plan which is a pure risk plan, endowment plan which has saving component in it and ULIP plan which has a growth component to help you gain profit from investments in markets.

How to ensure you have enough coverage?

There is a systematic way of calculating your life insurance need. Below are some of the ways you can use to ensure your life insurance coverage evaluation.

Human Life Value (HLV):

HLV is the calculation of present value of all the future income that you are expecting to earn in rest of the years till you retire. It is the amount that your family would require to sustain and retain their current life style and meet future needs. The amount calculated will help in indemnifying the risk to life of the bread winner in the family.

It can be formulated as existing contribution multiplied by your earning years less existing life insurance and accumulated savings plus outstanding loans and liabilities.

Earning years – Your current age and your retirement age difference is the earning years that will help to evaluate the number of years the monthly income needs to be replaced.

Income - Salary and any other income. Your monthly income is the most important source of income that helps your family maintain the current life style. Along with this you can also add any other source of income i.e. a part time job on weekends, rent from an ancestral home or any other property etc.

Existing Life Cover – You might already have an existing life cover from your past investments or your employer. Your existing life insurance coverage will help in the calculation of your comprehensive requirement. For e.g. – if you already have an INR 25 lakh term plan till the autumn years and your life coverage requirement comes to INR 50 lakh. In this case, you will only need more INR 25 lakh life insurance cover.

Assets – Liquid assets such as cash in the bank, fixed deposits, and any investment with a private institution, second home or property will help you evaluate your assets strength. This asset strength will help you to protect your family in times of crises.

Liabilities – Any personal loans, education loan, car loan or any other debts that you are obliged to pay over the period of time.

Let’s do a simple calculation to understand the same

Ramesh is 35 years old and plans to retire at 65. His annual salary is Rs. 5 Lakhs. He has a life cover of Rs. 10 Lakhs and has managed to save a total of Rs. 5 Lakhs since he started working and has an outstanding Home Loan of Rs. 25 Lakhs.

Here, Ramesh's Human Life Value is Rs 1.45 crores.

i.e. (Rs. 5 lakhs x 30 years) - (Rs, 10 Lakhs + Rs. 5 Lakhs) + Rs. 25 Lakhs = 1.45 Crore The ideal life insurance cover that Ramesh should carry is RS. 1.5 Crores.

Monthly household Expenses – Your monthly expenses can also give you an estimation of the money you require to run the family. You can also check the trend of the monthly expenses annually and get an estimate of inflation.

Future goals for your children:

When you are gone your spouse might find it difficult to pay for your children’s education and marriage. If you want to take this burden off your spouse you will need to evaluate the cost for their education fund and marriage expenses and add them to the required coverage amount. So for example, if you estimate the cost of your child’s education to be INR 20 lakhs and their marriage expense of INR 20 lakhs (after taking into account inflation) you will need extra INR 40 lakhs coverage added. This coverage will help take off the burden of life stage requirements and be better prepared for those important milestones of your family.

Fundamentally, your life coverage is the income replacement in your absence. Term life insurance plans are the cheapest plans premium wise and offer pure life risk cover with huge coverage. Endowment and ULIP plans have a saving component making them expensive in terms of premium. Depending upon your choice, budget and requirements you can opt for the different forms of life insurance cover. Having the right coverage is as important as having a life insurance itself so go ahead and calculate your life coverage requirement and indemnify your life risk and give financial freedom to your loved ones.

Here's a quick glance at the factors you must consider to determine how much life insurance you need.

Recommended Read: How to Choose The Best Life Insurance Policy?