Life Insurance Cover: How Much Life Cover Do You Need?

How Much Life Insurance Coverage Do You Need?

When you ask yourself, "how much life insurance coverage do I need?", the answer depends on your age, your income, the financial needs of your family and many other factors. Think of it as a financial safety net, not just for today, but for the years ahead.

The life cover you choose should help your family stay financially steady even if they lose your income after your death. For someone like Ramesh, a 35-year-old with two school-going kids and a home loan, the amount will look very different from someone just starting their career. The question isn't how much life cover do I need, but how much your loved ones will need in your absence.

Some Factors to Consider While Determining Life Insurance Needs

Your lifestyle, income, number of dependents, age, and financial liabilities like any existing loans all play a part in choosing the right life insurance coverage.

• Age

  At what age you are buying life insurance can play a role in helping you determine how much sum assured you need. When you are younger, you may choose to opt for a higher sum assured amount. When doing so, you can buy a higher coverage at a relatively affordable premium, since the premium rates tend to be lower when you are younger. You can also get a policy with maturity benefits so as to use it to fulfil your long-term goals. Another aspect of buying a life cover early in life is the tax benefits.

  You can start claiming tax benefits, subject to provisions stated in Income Tax Act, 1961 and as applicable, for your life plan as soon as you start paying your premiums.

  
  

• Lifestyle

  The sort of life you live can play an important role in helping you determine how much coverage you seek. It is not only the way you spend, or splurge, that you ought to consider when talking about choosing a sum assured. You also need to take into consideration the kind of work you do. On the other hand, if your job puts you in physically or mentally high-risk or high-stress situations, you may also want to consider a high sum assured, as well as riders to secure your family.

  
  

• Income

  Your income is also a factor that influences the way you live. When facing dire situations, you would want the maximum financial protection for your family. Thus, you can consider opting for a coverage that might be capable of providing your family with the sort of financial protection you have been providing them, at least for the next few years. It is often preferred that you choose a sum assured that is at least 10x higher than your annual income.

  
  

• Medical history

  If you have a history of any medical conditions, or are at a risk of any critical, chronic, or terminal condition, the premiums you will have to pay, may slightly be affected. You may consider opting for a higher sum assured. Use a life insurance premium calculator to get an idea of how much sum assured you can afford. In addition to this, also consider taking suitable riders with your plan, such as the critical illness rider, among others, on payment of additional nominal premium.

  
  

Underinsurance

Underinsurance is the concept of having a lower coverage than required. It means that the sum assured of your term insurance policy is not sufficient to cover your family’s financial needs in your absence.

For instance, say you want to plan for your child’s higher education which is expected to cost around ₹25 lakhs. Plus, your family needs a steady annual income of ₹5 lakhs to meet its basic household expenses. If you buy a term insurance plan of ₹25 lakhs, the policy might take care of your child’s higher education after your demise but what about the annual income required for meeting the household expenses? Thus, a cover of ₹25 lakhs is inadequate and an example of underinsurance.

Underinsurance can be avoided because of the following reasons –

• It does not give your family the financial security that it needs
• It defeats the purpose of insurance
• It might lead your family into a financial crisis
• It would not give you complete peace of mind

So, calculate the right term insurance coverage that you need when buying the policy. Avoid underinsurance and be adequately covered.

Top Approaches to Estimating Life Insurance Coverage

There's no single formula to decide the ideal coverage amount. But here are a few ways to help you find an answer to how much life insurance you need:

• Income Replacement Method : To determine the appropriate amount of insurance coverage needed to replace an individual’s income in the event of their death, the focus is placed on covering the deceased breadwinner’s total financial contribution. A straightforward method to calculate this income replacement value is by multiplying the current annual income by the number of years remaining until their expected retirement.
• Expense-Based Method : List your family's major future expenses, like children's education, marriage, daily living, etc., and match your coverage to meet those.
• Human Life Value (HLV) : The HLV assesses an individual's economic value by calculating the present value of their projected future earnings, after deducting liabilities, personal expenses etc to determine the suitable amount of life insurance coverage.
   

How to Use a Life Insurance Calculator to Estimate Your Coverage Needs

Before you settle on an amount, it's helpful to use a life insurance calculator. It's an online tool that uses your details to give you an estimated premium for life cover.

Here's how you use a life insurance calculator:
 

Step 1: Enter your personal and financial details

Fill in basic information like your age, gender, annual income, occupation, and any existing liabilities such as loans or EMIs.

Step 2: Add any extra coverage (optional)

Choose riders such as critical illness, accidental death, waiver of premium, etc., depending on your needs.

Step 3: Submit to get your results

Once you complete the form, the calculator will display the estimated premium amount or the cover you're eligible for, giving you a clear answer to how much life insurance do you need.

Benefits of using a life insurance calculator:

• Saves time : You don't have to sit with a calculator or use complicated formulas to figure out your premium.
• Fewer errors : Because the calculator uses tech-based logic, the chances of miscalculating your premium or sum assured are extremely low.
• Easy to compare plans : Try different cover amounts and see how your premium changes. You can instantly compare different scenarios and find a balance between what you want and what fits your budget.