Everyone has a need for Life Insurance, because everyone is exposed to some or the other risk in life. Insurance enables the head or earning member of family to discharge the sense of responsibility that he or she feels for those dependent on them. By payment of small premium they create an immediate estate for their family and dependents. But one of the biggest problem is many consumers simply have no idea how much life insurance they need.
You need to know this, not only as an individual but as a customer too –particularly in view of fact that majority of Indians are still either uninsured or under insured. For instance, you might have several insurance policies, but are you also adequately covered?
Needs keep on changing through the life stages of an individual. Insurance need also changes during life. One should periodically review insurance needs in order to ensure that life insurance coverage adequately reflects the present life situation. For, while little life cover could result in the family not being financially self-sufficient in the event of the unfortunate death of the policyholder and chief wage earner, too much insurance would mean higher outgo of premiums at the cost of necessary life stage and lifestyle spent.
Figuring out your life insurance needs sounds trickier than it actually is. The important thing is first determine whether you need life insurance, which kind is best for you and carefully calculate how much you need.
First question: Do you need life insurance at all? If you have dependent and don’t have enough savings, you definitely need insurance.
Second question: Which kind of insurance should you get? If you’re main concern is to protect your family against loss of your income (Unfortunate death), term insurance is the way to go. It is cheapest insurance.
Finally, how much insurance do you need? The answer is really depends on how much money your family need will need after you are gone. There are many factors that are relevant in determining the amount of life cover you should buy. It takes a few steps, but it’s not rocket science. Let’s go through it:
- Income Replacement: –The objective of life insurance is to ensure that your family can live same lifestyle after you as they do now. In the event of your untimely death, the income earned from investment of the policy pay out should replace your current income. For e.g Mr. A aged is 25 years with current household expenses of Rs.30, 000 pm will retire at 58 years. Taking into consideration an average inflation rate of 7% , his projected expenses at retirement will be Rs.2,79,760.Thus the amount required at retirement will be Rs.4 Cr. Approx. (person lives for 12 years after retirement assuming no inflation.)
- Consider Liabilities/ Debt: The insurance cover should also include financial liabilities such as home loan, car loan and other personal loan. For example if your outstanding principal balance on home loan is Rs.20 lakhs and car loan of Rs. 3 Lakhs ,you need a minimum insurance cover of Rs. 23 lakhs plus a little extra for accrued interest.
- Future obligations: -You should also have enough coverage to pay for future financial obligations like children’s education, marriage etc. For e.g if you need Rs.5 lakh for child’s higher education & 10 lakhs for daughter’s marriage, you should include that when you are calculating how much cover you require.
- Tally up the resources: Now look at total of your savings or investments (e.g. FD, MF, PPF, EPF etc.) suppose you have 18 lakhs So carrying on the above example your
Total need = Income Replacement + Loans + Future Obligation – Invest.
= 4,00,00,000 +23,00,00,000 +15,00,000 – 18,00,000
= 4, 20, 00,000 (4.20 Cr)