How do I know if I have enough Life Cover?

Are you sure you and your family are adequately covered with your Life Insurance policy? When thinking about buying a Life Insurance policy, you should always make sure you take a policy with adequate life cover. This is necessary as Life Insurance works as a financial shield from any uncertainties, and helps protect your life goals.

When assessing how much life cover you need, take into account your current expenses, your present income, future liabilities, inflation, etc. With all these factors in mind, you will be able to approximately guess the amount of cover you will require. This estimation will also help you in determining how much money would be required by your family during the different stages of life. Below are a few techniques to make this calculation simple:

Rule of thumb

All you need to do is multiply your present total income by 10 to 12 times. This would mean if your current income is Rs. 5 lakhs, your life cover should approximately be Rs. 50 lakhs to Rs. 60 lakhs. Easy, isn’t it?

Relate to calculate

Your current income and approximately the number of years left until your retirement are the two things you need to calculate the value of your insurance cover. For example, if your present income is Rs. 5 lakh and the assumed years left before your retirement is 25 years, you would need around Rs.1.25 crore of insurance coverage. This means you will need Rs.1.25 crore worth of insurance to substitute your anticipated earnings.

How much is too much?

Make a list of the various wants and goals of your family in the long run.

1. List out all the expenses you can think of. Right from day-to-day expenses, your monthly rent, insurance premiums, EMIs, medical expenses, outstanding loan liabilities, utilities, groceries, etc. We shall call this number - A.

2. Now include expenses towards family goals that you have in the pipeline – this could involve buying a house, financing your children’s higher education, their marriage, planning for a retirement fund, etc. You will reach a figure – Let’s call this B.

3. Add the possible consequences of inflation on all or some of those expenses you have listed out. Add this number to A and B. This calculation will leave you with a third number - C. How to calculate this? Let's just say your wedding expenses may be Rs. 10 lakh today. The same expenditure 10 years from now would be approximately Rs 20 lakhs, assuming an inflation rate of 7%. Doing this will also help you to determine when each of these obligations will arise.

4. Next, take a look at all of your present investments: your fixed deposits, recurring deposits, properties, postal saving schemes, income from rentals, shares and any routine or occasional origin of revenue and add these to the existing life cover you have in your policy. What you have now in your hands is an estimation of your expenses with all your current investments, inflation adjustment, your existing insurance cover and the present income. Let's call this - D.

5. Now go ahead and add these four numbers: A + B+ C+ D. Let’s call the result E.

6. From the total sum, go ahead and deduct your present income, existing life insurance cover and investments. In simpler terms:

Required insurance cover = E - (Present incomes + Existing Life Insurance Cover, if any + D)

The result that you get after deductions, is the amount of insurance cover you need. This number may be higher than what you have as insurance cover or lesser. If the outcome is negative, you may not need extra insurance cover to cover the risks.

In addition to the calculation methods presented above, a few more factors are to be kept in mind while determining the insurance amount: if your spouse is an earning member of the family, the insurance requirement will lessen. Also, keep in mind your family medical history of critical illness while planning the duration and value of the insurance cover. We hope you find it much easier now to make a wise choice on the ideal life insurance cover for you and your family.