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Know how much life insurance cover you need

Once you have made up your mind to buy a vanilla term life insurance, next biggest concern is How Much?

Avneet Kaur | June 30, 2016 | Updated 13:44 IST

Avneet Kaur, Principal Research Analyst, Business Today
The only logical kind of life insurance is term insurance which is the cheapest and simplest to understand. Term insurance serves the basic purpose of insuring the risk of loss of life. The moment, you go for any other form of life insurance, you deviate from your actual goal and are mixing insurance and investment which should be avoided.

Once you have made up your mind to buy a vanilla term life insurance, next biggest concern is How Much?

Now, do not go by the thumb rules. You have to be as logical as the logical kind of policy you are going to purchase soon. You are the best person to calculate the appropriate sum assured for your loved ones. Before starting on the calculations part, you must understand that this sum is not for you but, for your dependents or family members just in case any calamity strikes. Follow the steps to reach the sum.

Step 1. Estimate your day-to-day living expenses and goals: Life insurance cover should aim at providing same standard of living to your family members even in your absence. Ascertain the following expenses:

 

  •  Your yearly household expenses
  •   Outstanding liabilities like home loan, personal loan, education loan etc
  •   Present value of your goals like, child's higher studies, her marriage etc
Once done with listing household expense and your goals, you need to inflate the amounts to tackle inflation. Here is a small illustration on how to find inflation adjusted amounts.

 


 

Similarly, you may calculate your annual household expenses and inflate the same to reach the future sum. You may either perform the calculations using excel or just use a simple calculator, paper and a pen.

Step 2. Estimate your Savings, Investments and Other incomes: Once you have ascertained how much you need for your family's sustenance and to fulfil non-negotiable goals, it's time to ascertain your existing savings and investments. Here is a check list:

 

  • Check your stocks and mutual funds savings.
  • Check your savings into post office, bank fixed deposits or recurring deposits.
  • Second house or any plot of land bought with an intention of investment. Make sure you do not consider the home where you are living because you would definitely not want to sell it to fulfil any goals in future unless there is an emergency.
  • Any other source of income such as rental income from let out property etc.

Step 3. Existing insurance cover: You might already have a life insurance cover bought in the past or the one provided by your employer. Check the sum assured.

 

Once you are through with all the steps, subtract your total savings and existing insurance cover (derived in steps 2 & 3 from  inflation adjusted total living expenses and goals as calculated under Step 1.

The sum so derived is your life insurance requirement. Just in case the sum is negative, you do not need a life cover as you might have all the means to take care of financial needs of your loved ones in any unfortunate event

You may also visit life insurance companies website for taking the help of Human Life Value calculator to assist in the process. Remember, it is always better to buy slightly higher insurance cover than to be underinsured.

Tenure of your life insurance

Choosing an apt term is as important as is to be adequately insured. Go for a term till you retire or till you have financial dependents or till someone else steps into your shoes of earning bread and butter for your family.

Insurance is not to generate returns but to take care of your family in case of your absence. Hence, do not mix insurance and investment.

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