When your loved ones depend on your income, you must get life insurance to protect them from possible emergencies. The coverage ensures that they don't have to compromise with their lifestyle or life goals in your absence.
But how much life insurance should you have? What is the amount that can adequately cover your family's needs? With careful planning, your coverage can be fully prepared to handle any financial setbacks that may arise. Below are some of the standard practices to assess the ideal sum for your life cover.
1. Universal thumb rule
The purpose of life insurance is to replace your income if your dependants lose that financial support. Therefore, when trying to determine, "how much life insurance do I need?", the first thing to look at is your annual income. Your earnings support your family's livelihood and can be a good starting point to arrive at the amount suitable to sustain them in case of a tragic incident.
Financial advisors prescribe a common thumb rule as an estimate for a viable life cover`. Select a life cover that is 10 to 12 times your annual income1. For example, if you earn ₹ 10 lakh in a year, you can opt for a life insurance plan for ₹ 1 – 1.2 crore.
This figure may not be absolutely accurate in predicting the needs of those depending on you. But it gives a fair idea of the minimum life cover` amount you need for their wellbeing.
However, each family has different financial circumstances. Accordingly, their life cover` needs may vary. Hence, you should look into your current liabilities and future financial goals as well when you trying to figure out the right life cover amount for yourself.
2. Financial liabilities
Repaying your loans, mortgages or credit card dues can burden your family's resources if an unfortunate event occurs. Hence, you should add up any outstanding debts and include the sum in your cover amount.
Your family's expenses + your debts = your actual obligation.
3. Financial goals
You might have plans for some big spends in the coming years. Your children may need admission to a good college. You may need funds for their marriage. You might also want to ensure a comfortable retired life for your spouse. Such financial goals could also be based on expectations of increases in your future earnings.
Hence, you should base your life cover` calculations on your current income, any increase you anticipate, as well as your family's financial goals.
An online child’s education calculator can help you estimate higher education costs for when your child reaches the college-going age. You can add the sum to your life cover`.
4. Rising inflation
Along with present expenses, future expenses and debts, you also need to factor in inflation. The average inflation rate in India from 2012 until 2020 was 6.07%2. If you consider the same for the upcoming years, the amount sufficient to cover your family's requirements now will rise with time.
The following chart sums up the math needed to calculate your ideal life insurance:
|Expenses to add up
|Future household expenses
|Utility bills, food, school and college fees, medicine
|Home loan, car loan
|Future financial goals
|Children's education and marriage
|Retirement corpus for spouse
You can also use a human life value calculator to get the present value of future income, expenses, and liabilities. It gives the approximate amount needed to secure your loved ones' future in case of an emergency.
Considering outstanding loans, likely future expenses and inflation, you need an insurance cover bigger than your family's current requirements. Also, they will need the monetary support as long as they don't achieve financial independence. You should also take into account the time-frame for which your dependents will need your life cover's backing. All these parameters will help you in answering the question, "how much life insurance should you have?". You can then secure the lifestyle you want for your loved ones, even in your absence.
People like you also read ...
1 How much life insurance do you really need? - https://economictimes.indiatimes.com/wealth/insure/how-much-life-insurance-do-you-really-need/articleshow/22065416.cms
2 India Inflation Rate - https://tradingeconomics.com/india/inflation-cpi
` Life cover is the benefit payable on the death of the Life Assured during the policy term