Method 1: Income replacement
10-15 times of annual income
The easiest way to decide the amount of insurance cover is to take a cover of 10-15% of your annual income. This gives you up to 10 years to meet your family’s financial needs. For example, if your annual income is 20 lakh rupees, then you should take life insurance of at least 2 crores. Even if you get 7 percent return on an amount of Rs 2 crore, then your family will be able to get Rs 14 lakh every year.
Method 2: Need Assessment
Step 1: Adding up monthly expenses
This is a very detailed method. Under this, you calculate future expenses, debts and responsibilities. Suppose you spend Rs 50,000 every month – that is Rs 6 lakh annually. In case of sudden death, your family should have enough money to cover these expenses for 10-15 years. While deciding the sum insured, definitely add inflation as well. Overall, that can take a cover of 15 times of 6 lakhs i.e. 90 lakhs.
Step 2: Debt Assessment
If you have a loan going on, then in such a situation, life insurance will help your family in clearing the outstanding amount. Say you have a home loan of Rs 60 lakh. Your term insurance should also help you pay off this home loan amount in case you leave the family suddenly so that it does not become a burden on your family.
Third step – children’s education
You have to calculate how much amount will be needed in future for the education of children. If you want to teach children abroad, then you can estimate up to Rs 1 crore.
Step Four – Retirement Expenses
You may also worry about your partner’s retirement. After your departure, your partner does not need any other support for regular expenses, you can also arrange it through life insurance. In such a situation, you can take an additional insurance cover of 50 lakhs in your insurance for them,
Step 5 – Existing Corpus
Now you also have to take a look at your existing investments like Mutual Funds, PPF, EPF. If you have a portfolio of Rs 50 lakh, then you can deduct this amount from the total debt.
In the example given so far, if you are facing a total responsibility of Rs 3 crore (90 lakh + 60 lakh + 1 crore + 50 lakh), then deduct the part of your investment from it. Meaning you have to take a total cover of Rs 2.5 crore.
When you have done all these maths then try to get a simple term insurance policy. You can also buy insurance policies online. Often the premium comes down by up to 50 per cent when buying a policy online. Along with this, keep in mind that you will have to increase your insurance cover as the debt or responsibilities increase.
