So you finally realise how important it is to have a term insurance cover. You also are in agreement that buying a plan online can bring you considerable savings. You log on but pause when asked how much insurance you would like to buy.
A tentative estimate of what might be a good amount is the best way to proceed right? Wrong!
A decision on how much insurance is needed cannot be made offhand. Did you know that the average sum assured in India is merely Rs 1.42 lakh. This translates that the policy holder’s average monthly income is just Rs 2,000, which is far below the average Indian middle-class income. India is clearly underinsured so don’t join that club. The fact is, understanding how much insurance you need is almost as important as the need to be insured.
Two methods
There are two predominant ways in which you can calculate the amount of insurance that you may need; the need based method and the human life value calculator.
need-based method
Let’s begin with the need based method which calculates the insurance amount on the basis of the specific needs of an individual.
It accounts for the day to day family expenses till the life expectancy of the youngest person in the family.
The need based method further includes the financial liabilities such as home loans, car loans etc and the funds required to support the dependants for the desired period.
It may also include money required for specific family needs such as a child’s education or marriage.
For example, if Mr Sharma has a housing loan of Rs 40 lakhs, a car loan of Rs 5 lakh and his family requires Rs 50,000 per month if he is no more, the life insurance cover should be equal to the amount which will earn Rs 50,000 per month for the family and liquidate his outstanding home loan and car loan, taking inflation into account.
life-based method
Another way to calculating your insurance needs is using the Human Life Value index. Most online insurance companies and aggregators have this available on their portal.
This is a calculation of your financial worth. It takes into account your current income, assets and expected rise in income.
Some basic financial responsibilities is added to this to give a number which represents your financial value to your dependents in-case something were to happen to you.
Now it is important to not get overwhelmed by the amount these calculations throw up.
The number is a point of reference and must be put into the context of your present ability to set aside money.
Also, HLV and need based calculations are essentially moving targets and must be reviewed every 5-7 years. The end objective should always be to have planned in such a manner that in your absence, your family will not need to compromise on their yet-to-be fulfilled needs.
(The writer is the CEO and co-founder, of Policybazaar.com)
