How much Life Insurance Cover Do I Need?

2024-08-02

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Kunal is looking to invest in a Term insurance Plan. Everywhere he checks, he sees everyone offering a blanket INR 1 crore cover at varying price points. Each insurance agent is trying to outdo the other by offering a higher cover with varying benefits. Kunal is confused. Is INR 1 crore enough? Should he opt for the highest cover or the most affordable premium? What tenure should he opt for and what benefits does he avail?

Like Kunal, many of you might face a similar dilemma when it comes to purchasing a Life insurance plan. Unfortunately, there is no ready answer to this. We all have different career paths, income sources and expenses; different needs, goals and aspirations. It goes without saying that your insurance needs are as unique as you.

The primary objective of an insurance plan is to provide financial security to your family and dependents in case of an unforeseen event. You need a Life insurance cover that helps cover for all outstanding liabilities and offer a source of income for the family, helping them maintain a similar lifestyle while accounting for inflation and rising cost of living.

Here's how you can estimate your insurance needs:

Calculate Sum Assured

The insurance requirement should take a detailed look into your financial needs rather than just your income. Your expenses, assets and liabilities and important milestones three major heads you should consider while estimating your insurance needs.

Account for expenses (E)

Budget all monthly expenses for your family and multiply that by 12 to get a broad annual estimation of all the outgoing. This should include:

Household expenses such as rent/ maintenance, municipal taxes, etc.
Living expenses such as groceries and utilities, transport, house help, etc.
Lifestyle expenses such as vacations, dining out, entertainment, etc
Other expenses such as insurance premiums, education fees, medical emergencies, etc.

Extrapolate these expenses to account for inflation. Let's assume you are currently 40 years old and the expenses amount to INR 5 lakh a year, by the time you retire at say age 60 with 6% inflation these expenses will swell to about 16 lakh!

Even if you consider an average of INR 8 lakh over 20 years, your expense requirement till you retire will be 8,00,000 x 20 = INR 1.6 crore

Find out your Assets and Liabilities (D)

Take stock of your assets and liabilities. Ideally, your family should not have to liquidate assets to pay off any debt, but it's good to know they can be sold in the event of a contingency.

Assets include immovable property, stocks, bonds, deposits, gold, retirement funds, cash, etc.
Liabilities include loans, mortgage, outstanding payments on cards, etc.

Assume you have deposits worth INR 5 lakh, retirement corpus of INR 12 lakh, cash and gold worth another INR 4 lakh. Your total assets are valued at about INR 21 lakh.

Say you have an outstanding mortgage that you need another 15 years to clear. The EMI on the mortgage is INR 35,000 a month. Over a 15-year period, it adds up to 35,000 x 12 x 15 = INR 63,00,000.

So, the net of your asset and liabilities is INR 63 lakh-INR 21 lakh = INR 42 lakh outstanding.

Milestones (M)

Remember to account for important life events such as your children's higher education, their marriage, etc. under this category. If you do not have any responsibilities, you can avoid this section. For the sake of calculation, let's assume you need to set aside INR 15 lakh for your child's higher studies.

To arrive at an insurance estimate, you need to account for all the costs.

Estimated Sum Assured = E + D + M = INR 1.6 crore + INR 42 lakhs + INR 15 lakhs = INR 2.17 crore

Remember to periodically review your needs and check if your cover requires any changes or upgrades.

Also, if you don't want to spend much time doing these calculations, you can always find out your estimate sum assured requirement in 10 seconds with this quick link.

It is estimated that almost 80% of urban Indians are either underinsured or not insured at all. Take proactive steps to be a part of the other 20%. Choose an insurance partner that will give you the freedom to customize the coverage basis your needs.

Opt for an insurance policy such as the iSelect Smart360 Term Plan that offers comprehensive coverage till the age of 80, provides for accidental death and disablement benefits and also gives you coverage for terminal illnesses.

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