How much life insurance do we need?
Several individuals plan for their investments, but miss to plan for their life insurance. Do you know how much life insurance do we need? Here are some of the tips on how to compute the amount of life insurance an individual may require.
There are several methods to compute on how much life insurance do we need and there is no hard and fast rule for this.
a) Simple computation: Under this method, one can compute the life insurance by multiplying their annual income with 8 or 10 times. The assumption here is an individual’s family can survive for 8 to 10 years in the absence of the insurer. E.g. If an individual has ₹ 5 lakh per annum income, he need to take ₹ 40 lakhs to ₹ 50 lakhs as insurance. This is the quickest and simplest way to compute know how much life insurance do we need.
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b) Capital fund method: Under this method, one can compute the insurance requirement by calculating the yield of the life insurance value. E.g. If a person has an annual income of ₹ 5 lakh, then to earn this ₹ 5 lakh per annum @ 8 % interest p.a, an individual requires ₹ 60 Lakhs as capital. So an individual can take ₹ 60 lakhs as insurance for him or her and in case the insurer is not there, his family can deposit in a bank and earn ₹ 5 lakhs per annum @ 8% interest.
c) Family need method or detailed insurance coverage method: Insurance can be taken by adopting a detailed method. This method is generally advised by many financial advisors too.
Compute regular expenses: Consider all regular expenses which are required to run our home. Add any quarterly or yearly expenses and apportion this as monthly regular expenses. It includes all groceries, mobile charges, rents, insurance, etc. The amount of such regular expenses should be computed for 8 to 10 years time period. e.g. if all such expenses per month are coming to ₹ 25,000 per month, then the amount required under this category would be ₹ 25,000 x 12 (months in a year) x 10 years = ₹ 30 lakhs
Debts: Consider all house loan debts, car loans, personal loans etc., which you are paying every month. Your family should not end up in selling them to pay-off debts when you are not there. Assume that the total debts are ₹ 15 lakhs.
Children education: Education has become costly and fees are increasing year on year. If you consider 5% annualized increase in year on year education cost, estimate what would be the approximate cost of your child education. Assume that it is ₹ 5 lakhs.
Add any other expenses which are not forming part of above costs.
Now the total amounts required running your house + pay-off all debts + completing child education, would cost you ₹ 50 lakhs. Means, you should take a life insurance for ₹ 50 lakhs to meet your family needs under this method. This is the accurate way to compu