How Much Life Insurance Do I Need? – Forbes Advisor INDIA

A life insurance policy is a financial guard for your family in your absence. It is a contract between the insurer and the policyholder wherein the insurance company has to pay a pre-determined amount of money to the beneficiary in the event of the policyholder’s untimely death in exchange for premiums paid during the tenure. 

One of the first things to ponder when buying a life insurance policy is the coverage needed. When choosing coverage, remember the objective of buying a life insurance policy: to provide financial assistance to your family in the event of your untimely demise or if you cannot work due to a chronic illness. 

Assessing your financial goals and estimating the coverage needed to achieve those goals is always suggested. Insufficient awareness of such parameters can jeopardize your goals and cause financial distress. 

Factors To Consider When Deciding Life Cover Amount

A few aspects to consider when determining the appropriate amount of life insurance include savings, debts, income, expenses, and the family situation.

The amount of the death benefit depends on your financial needs. For example, if you seek life insurance to replace your income in the event of your death, you may need a policy with a significantly higher death benefit than if you only need coverage for your current liabilities.

Family expenses play a major role in determining the sum assured for life insurance. The objective of life insurance is to maintain the same level of lifestyle that you had provided to your family even in your absence. Expenses like the education of your child, associated cost of care, and children’s marriage can be outrageously draining. Life insurance comes to the rescue to pay off such exorbitant expenses. A professional course like MBA can cost a minimum INR 25 lakh in India. The average tuition fee in most schools across tier-I and II cities can range between INR 60,000- INR 1.5 lakh per year. Considering inflation, your life insurance cover must be decided based on such potential expenditures. 

Your age is also a crucial deciding factor for the sum assured in a life insurance policy. When you are young and single, you fall into a lower-risk profile and have fewer liabilities. One can opt for the life stage benefit rider, which will let you increase your coverage in the future as your dependencies go up. You must consider your family size when choosing a sum assured. How many dependents do you have? How many people do you need to provide for? A young child needs more income to support than a graduate who can soon live on his income. Your family’s needs should be part of calculating life cover. 

Also, the industry now offers more value in plans with a return of premium at no extra cost. It’s natural to wonder what happens to your plan and premiums if you survive the term. These plans offer a one-time option to exit the policy after you turn 60 and return all your paid premiums excluding the GST.

Methods To Calculate the Sum Assured  

There are several methods for calculating life insurance needs. Some of these include multiplying your income by 10, the DIME (debt, income, mortgage, and education) method, using a life insurance calculator, and calculating the coverage amount manually. 

When determining the sum assured of life insurance, the general rule of thumb is multiplying your annual income by 10. Considering the rising cost of living and soaring inflation, expenses tend to double every 10 years. To provide financial security to the family for a longer duration, individuals need to multiply their annual income by 20 and accordingly buy a cover. 

Another way to calculate the cover amount is the DIME method wherein you consider debt, income, mortgage, and education. Calculate how much debt you need to leave to your beneficiaries. Multiply your income by the years you want to provide income replacement for your family. Adding any mortgage payments to the total liabilities, cost of school education and your child’s higher education will help you arrive at an adequate sum assured. 

However, the DIME method doesn’t consider other family expenses required to maintain the same lifestyle. So, these methods don’t give a full picture. 

One of the crucial methods to calculate the amount of coverage is using the human life value (HLV) concept. It is an assessment that factors in financial obligations one needs to take care of in one’s lifetime. It considers aspects such as how much annual income your dependents will need, how long they would need financial assistance, the amount of debt needed to pay off, education expenses of your child, burial expenses, savings you have, the amount of life insurance you already possess, inflation rate and lifestyle changes. When buying a policy online, aggregators offer a HLV calculator that gives a clear picture of the cover amount by answering a few simple questions. 

You can also calculate the coverage amount manually by adding your financial responsibilities and subtracting your existing assets which can help pay off bills. 

Types of Life Insurance Policies to Consider 

Life insurance comes in different variants to suit consumers’ specific needs. In addition to life cover, it offers the benefit of investment to fulfill financial goals.

1. Term life insurance
   Term life insurance plans provide a death benefit to the nominee in case of the policyholder’s death, either in a lump sum or installments. These are the purest form of life insurance and are also highly popular because they provide high coverage at affordable premiums. Several variants of new-age term insurance now cater to specific consumer segments. 

   For instance, independent term policies are available for homemakers that eliminate any dependency on the spouse or their income to obtain a policy, or Saral Jeevan Bima, which provides term insurance to lower-income groups who often can’t afford a policy.

2. Guaranteed plans
   Guaranteed plans are another form of life insurance that’s gaining popularity because of its value-driven proposition. Offering high returns of up to 7.5% at no market risk, these plans are a useful investment option that gives life insurance coverage and tax benefits. The rate of return is locked at the time of purchase and remains unaffected by external factors like changes in tax rules or market vitality. These plans are a great addition to your portfolio if you want an insurance-cum-investment plan.

3. Unit-linked Insurance Plans or ULIPs
   ULIPs are yet another lucrative option for insurance-cum-investment plans. These plans offer the opportunity to create wealth with their high performance of up to 12-14% return rate, as observed in the past under favorable market conditions. They also provide life protection coverage along with tax benefits. 

   Child investment plans also include a valuable optional add-on feature called Waiver of Premium. If the policyholder passes away untimely, the insurance company waives and pays the future premiums. The policy and its benefits remain intact, greatly alleviating the financial stress on the family’s shoulders and continuing to shield the dependents.

Bottom Line

Considering the uncertainties of the modern world, life insurance is the foundation of all financial planning. Before investing in a plan, ensure you have evaluated all the factors affecting your decision and then choose adequate coverage. Online platforms have made it a lot easier for consumers to research and make informed decisions. If you still need help reaching a conclusion, it’s always advisable to consult a financial advisor before you invest.