Life insurance has become a vital tool of financial planning. It creates a safety net of finances for your family, offering crucial support in times of need. However, one of the most pressing questions is: How much life insurance should one buy? Due to India’s unique socio-economic dynamics, finding the right coverage requires careful consideration of several factors, including any personal loan for salaried or other financial obligations. Balancing your life insurance with these commitments ensures comprehensive security for your loved ones.
Here’s a step-by-step guide on calculating the exact sum of life insurance coverage you need.
Importance of Sufficient Life Insurance Coverage
Indian families are usually dependent on one breadwinner. His death could result in financial ruin. Adequate life insurance protects:
- Outstanding loans and liabilities.
- Children’s education and other future expenses.
- Dependents’ standard of living.
- A medical expense or an emergency.
What to Consider in Determining Life Insurance Coverage
To know what coverage will work right for you, consider the following:
Your Annual Income: It has been said that it should be 10 to 15 times your annual income, keeping enough money available to replace income for years.
Liability Cover: Your life cover must be sufficient to pay off the liabilities you have so your family is not bothered.
Future Financial Goals: You must also provide for expenses that are to be incurred for significant life goals like children’s education, marriage expenses, retirement corpus for spouse etc.
Expenses of Dependents Lifestyle: Consider how many years and how much your dependents will require every month.
Inflation Rate: Since inflation in India stands between 4% and 6%, inflate all the calculations so that your family’s future financial needs are better catered to.
Techniques to Find Life Insurance Cover
Human Life Value (HLV) Method
The HLV method of estimating the worth of a person in the economy is calculated by:
- Earnings/net annual income
- Expenditure
- Liabilities
- Inflation
The calculation formula:
HLV = (Annual Income – Annual Expenses) x Working Years + Liabilities
Replacement Approach of Income
This method determines the number of covers you require to replace your income for a stipulated period.
Coverage = Your Annual Income x Number of Years You Desire to Support
Needs-Based Approach
This approach focuses on specific needs like:
- Education costs
- Debt repayment
- Living expenses for dependents
- Emergency funds
Avoid Common Mistakes
- a) Shortfall in Meeting Needs: Many people short-change their insurance needs and leave loved ones underinsured. Be honest about your future costs and liabilities.
- b) Inflationary Erosion: The costs of education, healthcare, etc., will inflate with time. Your coverage must be able to catch up with the inflationary rise.
- c) Depending on Group Insurance Offered by Employer: It is mostly inadequate and tentative, as well as employment-based employer-sponsored group life insurance. Obtain an independent policy for total coverage.
Utilize Online Calculators
Most Indian insurance companies have provided online calculators to determine the amount of life insurance coverage. Through such calculators, you can input your income, liabilities, and future plans to receive an estimate of the coverage required. Additionally, you can get guide on easy loans, making it simpler to secure the financial support you need to cover any additional expenses beyond insurance.
Annual Review and Update
Life Insurance does not take a once-and-forget decision. It is, instead, a product that needs to be re-evaluated at every important turn in life, such as:
- Marriage
- Birth of a child
- Purchase of a home
- Career progression
Riders can Avail a Higher Sum
Riders are add-ons that provide extra benefits. Popular riders in India are:
- Critical Illness Rider: The rider covers severe illnesses like cancer or heart disease.
- Accidental Death Rider: The rider provides additional coverage in case of death due to an accident.
- Waiver of Premium: It ensures policy continuity if disability cannot pay premiums.
Consult a Professional
If you can not calculate coverage, seek advice from a financial advisor or insurance expert. They will guide you on what you need and which is the most favourable policy.
Conclusion
Calculating the right amount of life insurance in India involves your income, liabilities, and future goals in the context of inflationary pressures. Methods such as Human Life Value, Income Replacement or Needs-Based approaches can guide you in determining an appropriate amount.
Remember, it’s a life assurance product, not a purely financial one; instead, it promises to protect those who love you. Invest time in assessing your needs and opt for a policy that provides comprehensive cover and peace of mind.
Doing this ensures that no matter what life takes in store for you, your economic future is taken care of.
