How Much Life Insurance do you Need?

Life insurance plans are essential for protecting your family or dependants from a financial disaster in case of your untimely death. By taking an insurance cover you are able to protect your dependants in after your demise by providing them a secure future at least financially.

Though the emotional loss cannot be compensated an insurance plan definitely secures them with the ability to survive and financially be taken care of. So insurance is definitely indispensable for anyone who has dependants.

But the key questions are:-

– What type of insurance should I go for?

– How much life insurance do I need?

Type of Insurance

Before digging into how much life insurance is needed, let’s review the best life insurance option for you. To put it in simple terms, insurance is like a savior or messiah that helps your family in your absence and helps them at least tide over financial losses they may face currently and in future.

For this need I would recommend a term insurance plan which is available for a specified number of years. Read more about term insurance plans in our blog – best life insurance plan.

For example if you take a term cover of Rs.20 lakhs for 20 years, then you will be covered for a period of 20 years and in case of your death at any time before the expiry of the term of 20 years, your family will be compensated with Rs.20 lakhs. So it is always advisable to go for a pure term insurance plan, for a longer term at a younger age.

Thumb rule to determine – How much life insurance you need

So really how much life insurance do you need? There are different ways of ascertaining your insurance requirement.

One of the simplest methods is the rule of thumb, which says that insurance cover should be atleast 7 times (multiple) of your annual income or can go up to 10 times your annual income depending on individual needs.

For example if your income is Rs.16,000 per month and given the simple thumb rule of 10 times annual income, your insurance cover comes to Rs.19,20,000. This is just a ball park figure and not fool-proof method although it gives you a broad idea.

Recommended Approach to determine – How much life insurance you need

There is no one-size-fit-all approach to determine how much life insurance you need. The above rule may not produce desired results for all because you may have certain individual needs such as personal debts, mortgage and other liabilities that need to be taken care of.

Further, your dependant’s future plans such as higher education, marriage, retirement, etc may also have to be provided for. There is a possibility of underestimating your insurance cover that you need.

One the other hand if you have abundant savings, high value assets, investments, etc you may not need a high insurance cover since your piggy bank and investment kitty may compensate in your absence.

So taking all the above factors in to consideration, include the following to your insurance cover:-

A. Future Income Needs

B. Liabilities

C. Assets/Investments

Your Insurance Cover/Amount will be A + B – C

Recommended Approach to Estimating Insurance Amount

A covers your regular income and lump sum needs. Regular income would be current income and expected increase in future income as well.

B is meant to settle any debts, liabilities, etc that you or your dependants may have.

C consists of assets or investments that can be liquidated in case of your demise (but exclude assets that you want to retain – say your house).

Illustration

You may be clueless on how much life insurance is good enough. But you can get to that number by analyzing a few personal stats

Let’s take an example here. If you have an income of Rs.16,000 per month as above, which is required for about 10 years for the smooth functioning of the family.

Further, let’s assume you have liabilities amounting to Rs.1 lakh. Lets assume that you have investments worth Rs.40,000 that can be used in case of emergency.

Let us also assume that your daughter may get married after 10 years and the expenses for wedding would be about Rs.2 lakhs.

A. Future Income needs (Rs.16000 *12*10 + wedding expenses)   Rs.21,20,000

B. Liabilities                                                                                                              Rs  1,00,000

Sub Total                                                                                     Rs.22,20,000

C. Assets/Investments                                                                                          Rs.   40,000

Required Insurance Coverage (A+B-C)                                                          Rs.21,80,000

Conclusion

This above suggestion is just a generalized method and broad guideline for you. To get an accurate assessment you can discuss with your financial planner or advisor to ascertain the right amount of insurance.

Your financial advisor should be able to help you ascertain the various components (A, B & C) that are required for the above calculations.