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How Much Life Insurance Do I Need?

IndianMoney.com Research Team | Posted On Thursday, April 25,2019, 01:21 PM

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How Much Life Insurance Do I Need?

 

 

Is term life insurance of Rs 1 Crore enough? After marriage and kids you get the feeling that a term life insurance cover of just Rs 1 Crore might not be enough. Things are expensive today and you struggle to make ends meet. How will your family manage the daily expenses on an untimely demise? What about the home loan and other liabilities? How will your family pay them back? This begs the question. What is the right amount of life insurance for me?

Want to know more on term life insurance? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

How Much Life Insurance Do I Need?

How much Life Insurance should you buy?

To decide on the amount of life insurance you must consider:

  • Current Annual Income:

Before availing term life insurance, take a look at your current annual income. Avail term insurance with a sum assured of at least 10 times annual income. Many people feel comfortable with sum assured of at least 20 times annual income. With rising costs due to high inflation, you might just need this cover.

If you are earning Rs 5 Lakhs a year, avail term life insurance with sum assured of Rs 1 Crore. This amount would prove handy for your family in case of an unexpected demise.

  • Current and Future Financial Liabilities:

Financial Liabilities like home loan and car loan must be repaid and you can’t leave this to your family on an unexpected demise. Your family would struggle with EMIs along with the daily living expenses in the absence of the breadwinner. Make sure term life insurance cover is sufficient to repay all liabilities.

This begs another question. What about investments? Your family needs investments especially liquid investments like FDs, Mutual Funds or Stocks. Consider the approximate value of all these investments. Then decide the term life insurance cover you need.

SEE ALSO: What is meant by Life Insurance?

Financial goals are very important vis-à-vis term life insurance cover. The very purpose of availing term life insurance is to help your family meet financial goals in your absence. The main financial goals are children’s education and marriage. Take a look at Child Goal Planner Calculator. Consider these liabilities and the effect inflation has on education and marriage before taking a decision on term life insurance cover.

  • Take a Look at Financial Goals

Financial goals are very important vis-à-vis term life insurance cover. The very purpose of availing term life insurance is to help your family meet financial goals in your absence. The main financial goals are children’s education and marriage. Take a look at Child Goal Planner Calculator. Consider these liabilities and the effect inflation has on education and marriage before taking a decision on term life insurance cover.

  • Age at Which you Avail Term Life Plan

The age at which you avail term life insurance decides the cover you need. Cover is different depending on life stages. Take a look at thumb-rules for term life insurance cover.

  • Choose policy tenure very carefully before availing term life insurance plan.
  • Avail term life insurance at a young age. (Preferably in your 20’s).
  • Buy term life insurance at a young age and opt for maximum tenure.

How Much Life Insurance do You Need?

Before you decide on how much life insurance you need, let’s understand Human Life Value or HLV. Human Life Value is the amount of life insurance you need to cover future earnings in case you stop working today. The correct amount of life insurance you need can be calculated from Human Life Value Calculator.       

Let’s calculate insurance corpus with an example.

Rakesh earns Rs 10 Lakhs a year. He is 34 years old and wants to retire at 60 years. Let’s assume his salary rises by 8% a year and his investments give returns of 10% a year. How much insurance does he need to replace income?

You may use Microsoft Excel Formula to calculate Insurance Corpus.

Insurance Corpus = Present Value (Adjusted Rate %, Number of Earning Years Left, - Starting year income).

Mr Rakesh would require an insurance corpus of Rs 2.04 Crores. 

SEE ALSO: 7 Wrong Reasons for Availing Life Insurance

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