# How much life insurance do we need?

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 Rs 5 lakh per annum income, he need to take Rs 40 lakhs to Rs 50 lakhs as insurance. This is the quickest and simplest way to compute know how much life insurance do we need.

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 Rs 5 lakh, then to earn this Rs 5 lakh per annum @ 8 % interest p.a, an individual requires Rs 60 Lakhs as capital. So an individual can take Rs 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 Rs 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 Rs 25,000 per month, then the amount required under this category would be Rs 25,000 x 12 (months in a year) x 10 years = Rs 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 Rs 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 Rs 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 Rs 50 lakhs. Means, you should take a life insurance for Rs 50 lakhs to meet your family needs under this method. This is the accurate way to compute on how much life insurance we may require.

Now you would have got doubt about the premiums charged by life insurance companies to take such insurance. Consider taking term insurance policies where you pay very less premium and get high insurance coverage.

This way, you can plan well on life insurance and keep your family secured even when you are not there. How many of us know that we can achieve such goals even when we are not there by doing a simple planning well ahead of time.

Suresh
How much life insurance do we need

• Mubarak Shaik

Dear suresh

I would like to take Term insurence plan for 50 Lakh Plz suggest me the which Company plan is best. My age is 28 and tenure upto 75.

Thanks

Mubarak Shaik

• Shaik, There are several term insurance policies. However you need to go based on settlement ratio and then for lower premiums. You can look for LIC Term insurance policy, HDFC Click 2 protect, Birla SL Term insurance and ICICI term insurance. The order is followed based on the settlement ratios

• Mubarak Shaik

what about Ageon Religare compared to HDFC click 2 protect.

• Shaik, I heard Aegon Religare is also good. However since these are new insurance companies and hence settlement ratio is still low. Hence better to go to companies where there is high settlement ratio.

• Mubarak Shaik

Hi suresh,

Iam 28 Yrs old annual income of 4.5 Lacs now iam having LIC Jeevan anand SA 10 Lac. This Insurence cover is sufficient for me or I have to go for term insurence plans i have 2 kidis + 2 dependents (wife and mother) and also plz suggest good term insurance plans with and without premium return.

Thanku

Mubarak Shaik

• Mubarak, I have already indicated in this article about several ways on how you can compute your insurance needs. Based on that, you can compute the same and arrive at what insurance amount you would require. e.g. if you have Rs 20,000 per month expenses. It makes sense to consider taking insurance for 12 to 15 years i.e. Rs 37.5 Lakhs (15 years). You can go for HDFC Click 2 protect or Birla SL term insurance or ICICI Pru term insurance as their settlemnt ratios are high and premiums are low.

• Bharat

Dear Suresh,
Thank you for the Article. It is really very helpful. I request one more information from you. Is there any insurance policy which provides coverage, if the insured person is disabled due to some reason during the policy years. If the insured person can not continue work then the insured sum would be of great help to the family.

• Bharat, Majority of the insurance policies issued now has “riders”. It contains “Critial illness rider” or “Permanent disablement rider”. You are talking about second one. It is very important for people to consider these riders.

• PRAKASH.KULKARNI

Very good information.Helped me very much in calculating the insurance required.

• kuntal

Dear Suresh,

I have few Term plan- 5L,10L, 25L Sum assured amount from SBI, ICICI; However my insurance advisor now advices- that instead of paying 16k of premium over these three policies- i can pay smaller amount for one policy with 1crr/1.5crr as Sum insured. I already have taken 1crr and policy from aviva recently; However i feeel uncomfortable over surrendering back earlier policies as i doubt if any of these companies would deny or not payback… when am not there; what do you suggest ? my current age- 41.

• Kuntal, What you said is true to some extent. Insurance companies risk payments depend on various parameters like settlement ratio which is very important. My suggestion is take insurance coverage policies from 2-3 insurance companies to diversify the risk. Refer my article on how to choose term insurance policies which provides some insights. I do not advice you to surrender 3 policies from various insurance companies and take one policy from an insurance company. You might be taking risk by taking single policy.