How much life insurance cover do I need ?
When buying a life insurance very few us think about "How much life insurance cover do i need ? ". Most of us buy life insurance only to save on income tax and for investment purpose. Many individuals either do not own any insurance policy or have a very low insurance cover .
Minimum life insurance cover required for a person is basically calculated based on human life value. Human life value is the present value of your future income. It means in case of your unfortunate death, your income from salary might not be available to your family, but life style expenses and liabilities will still be there.
Human life value is calculated based on below factors:
1.Age and savings/investments: Younger individuals generally do not have enough savings or investments to take care of their family in case of their unexpected death. For younger individuals it is advisable to buy a higher life insurance to cover the shortfall of lower savings.
One can go in for multiple term life insurance policies and in future you can terminate policies depending on the savings you accumulate. Individuals who have made enough investments/savings can go in for lower sum insured.
Example:30 year old individual can buy 2 crore insurance cover through two policies of 1 crore each. On reaching 50 years of age he finds that he has enough savings/investments so he decides to terminate one policy to reduce his cover by 1 crore.
For individuals 50 years and older, getting a life insurance will be costly on account of any pre-existing diseases and higher risk of death. It is advisable to go for life insurance in early age to avoid hefty premium.
2.Monthly income and dependents: You may need a higher life insurance cover, if you are the sole bread earner in the family. In case you have a family business or other earning members , then you can go in for a lower life cover. After taking price inflation into account, life insurance cover should be enough to take care of all future expenses of your family.
More the dependents higher the life insurance cover. Some insurance companies offer option of life stage protection, where in the policy cover can be increased at life stages such as marriage or child birth.
If you have no dependents and no liabilities then it does not make any sense to go in for life insurance. For example unfortunate death of child or housewife will not have any financial impact on family as they do not contribute to family income .
Life insurance cover can be 10-12 times the annual income or 15-18 times the annual expenses plus other liabilities/obligations.
3.Liabilities: Life insurance cover should be enough to take care of all your liabilities like home loan, vehicle loan, personal loan, credit card dues etc.
4.Future Obligations: One also needs to take into consideration the cost of future obligations like children’s education and marriage, buying new house etc. It would be a good idea to buy a life insurance policy on birth of your children which would take care of their expenses in your absence. Life insurance policy can be terminated when you meet the obligations or when you have saved enough to meet them.
Formula to calculate minimum life insurance cover:
Minimum Life insurance cover required = (Family life style expenses +Future obligations + Liabilities) minus your (Savings /Investments)
Example:Your annual income is 9 lacs and have 20 lacs home loan liability. As per your estimation 15 lacs will be required in future for your child education and marriage.Your net assets are worth 25 lacs. Better not consider value of house in which family lives while calculating nets assets.
Family life style expenses = annual salary x 10 years = 9 x 10 =90
Future obligation = 15 lacs (child education and marriage)
Liabilities = 20 lacs (home loan)
Assets = 25 lacs
Minimum life insurance cover required = 90 +15 + 20 -25
= 100 lacs ( 1 crore)
Now you can calculate how much life insurance cover you need.
Term life insurance provides you with higher insurance cover at lower premiums as compared to other insurance products.