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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 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: 

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What is Life Insurance? 

Life insurance is a contract or agreement between an insurer and a policyholder where the insurance company promises to pay a fixed amount of money in exchange for a premium, in case of the life assured’s demise or after a specified period. 

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

How much Life Insurance Coverage You Need? 

We all are very much aware that purchasing a life insurance plan is a necessity these days to protect your dear one’s requirements. This life coverage secures the future of your family members by paying a lump sum in case of an unforeseen event. Just buying a life insurance policy is not sufficient, the main intent behind this is to ensure that you have sufficient life coverage to meet your family’s requirements. So now the concern is How much life insurance coverage one needs? A Life Insurance calculator will help you in predicting the right coverage for you. 

Life Insurance Calculator 

A monthly or annual premium for a life insurance policy is computed using a life insurance calculator. It helps you in determining the exact premium you are required to pay to get the desired sum assured guaranteed. In order to make your selection easy, five methods are available to determine how much life cover one needs: 

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

  1. 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 based on 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 is invested over Rahul's 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 8%
    Working Span 20 years
    Human Life Value  Rs 3.9 lakh

    Know your human life value here.

  2. 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 1.2 crores (4,00,000*30).

    Why buy Term Insurance early?

    Your premium is decided on age at which you buy the policy and remains same, throughout your life

    Premiums can increase between 4-8% each year after your Birthday

    Your policy application could be rejected or premiums increase by 50-100%, if you develop a lifestyle disease

    See how age affects Term Insurance Premiums
    See how age affects Term Insurance Premiums
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  3. 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 a 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.

  4. 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.

    *All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply 

  5. Method 5: - Premium as a 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 premiums. 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).

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

Wrapping It Up!

Life insurance coverage needs to change with 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.

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