A good life insurance policy can protect your family's future in your absence. Having
adequate
life insurance will ensure that your family can maintain the same standard
of living in case of an unforeseen event but what about the amount of coverage?
How much is enough?
Calculating the amount of coverage is a simple process:
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First, calculate your family's annual expenses
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Ideally, you should prepare for a time frame of 15 or 20 years. So multiply your
annual expenses by 15
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Ideally, you should prepare for a time frame of 15 or 20 years. So multiply your
annual expenses by 15
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Finally, deduct the value of the assets you own, like the value of an apartment,
savings in gold, FDs, etc. You will also have to deduct the expenses related to
your wish list – sending your daughter abroad for education, her marriage, etc.
The final amount you get is known as the Human Life Value (HLV). Simply put, this
is the amount of life insurance you require.
The simple formula for calculating HLV is:
HLV = (Expenses towards family * HLV factor) + Liabilities – Assets and Dreams
First, calculate your family's annual expenses
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Age: Your life insurance needs should change according to your age. For instance,
when you are young, you may require a small amount of coverage. However, as you
get married and have more responsibilities, you may need to increase the coverage
amount.
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Annual income: The life insurance premiums will come from the amount left
after deducting your expenses. You hence need to look for a plan which is affordable
for you. Also, according to experts, your life insurance cover should be eight to
ten times your gross annual salary. For instance, if your gross annual income is
Rs 1,00,000 then your life insurance coverage should range between Rs 8,00,000 to
10,00,000.
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Financial goals: Your financial goals can be based on your immediate cash
requirements or your long-term needs. For instance, if you need a certain amount
for your children's education or marriage, you need to choose your coverage amount
accordingly. This is to ensure that those goals are met even in your absence.