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4 Ways to Calculate your Life Insurance Coverage

Calculating how much life insurance coverage you need is one of the most important steps when buying a policy. However, most of the people find it difficult to compute the exact life insurance amount they need. Having said that, there are many ways through which you can calculate how much life insurance coverage you actually need, read on to know more:-

Method 1:- Human Life Value

According to this method, the amount of life insurance coverage one should buy is directly proportionate to the economic value, otherwise called human life value (HLV). It is the capitalized value of an individual for the rest of their life and is calculated on the basis of current inflation. The HLV is calculated on the basis of three factors — age, current and future expenses, and current and future earnings. Let’s understand it with an example.

Rahul aged 40 years, working in a private company, draws an annual salary of Rs 5 lakhs. His personal expenses are Rs 1.3 lakh/annum. His remaining salary i.e; Rs 3.7 lakh is left for his family to live their daily lives. Here, the surplus income is Rs 3,70,000, which is also Rahul’s economic value. This money if invested over Rahul' working span will translate into his HLV. The calculation is done as under:-

Gross Total Income

Rs 5 lakhs

Personal Expenses

Rs 1 lakh

Tax Payable

Rs 15,000

Insurance Premium

Rs 15,000

Retirement Age

60 years

Surplus Income for the Family

Rs 3.7 lakh

Expected Rate of Return


Working Span

20 years

Human Life Value

Rs 3.9 lakh


Know your human life value here.

Method 2:- Income Replacement Value

This is a basic method of calculating your life insurance coverage needs and is based on your annual income.

Required insurance coverage: Annual Income * Number of years left for retirement

For instance, your annual income is Rs 4 lakh and you are 30 years old and plan to retire after another 30 years. In this case, your required life insurance coverage is Rs 12 crores (4,00,000*30).


Method 3:- Needs Analysis

In this method, the calculation is done on the basis of day-to-day family expenses till the life expectancy of the youngest member in the family. The major factors to consider for assessment are:-

  • Number of dependents and their needs
  • Loans
  • Children education
  • Children marriage
  • Provision for non-working spouse
  • Kind of lifestyle you want to provide your family
  • Any other special need

Once you sum up all the above expenses, the figure you arrive at is what the family needs today, considering that you will die today. Then deduct the life insurance policy you already had and all your assets. This new figure is the gap that you need to bridge. Note that invested assets do not include residence and car.

The needs analysis scores over Human Life Value as the former considers financial needs that may arise at different life stages. However, the Human life Value assumes that people are going to earn the same income throughout the tenure, thereby not giving a complete picture. Additionally, you can use the needs’ analysis to assess your retirement needs.

Method 4:- Underwriter’s Thumb Rule

Under this approach, the required sum insured should be in multiples of annual income depending on the age. For instance, individuals between 20 and 30 years of age should have life insurance coverage worth 25 times of their annual income, while those above 40-50 years of age should have life insurance coverage 20 times of their annual income.

Method 5:- Premium as percentage of income

According to this rule, 6% of the breadwinner’s annual income plus an additional 1% for each dependent should be spent on life insurance premium. Say your gross annual income is Rs 5 lakh and you have two dependents — your wife and child. Your life insurance premium should be Rs 40,000 (6*500000+1*500000*2).


Life insurance coverage needs change with the time, therefore, it is important to review your insurance needs regularly. Also, the above methods give you an indicative value only. The final insurance portfolio should be decided as per your financial standing.

Also Read: Is your insurance cover too little?