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:
· First, calculate your family's annual expenses
· Ideally, you should prepare for a time frame of 15 or 20 years. So multiply your annual expenses by 15
· When you get this number, add any liabilities you may have, like home or car loan
· 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
In addition to HLV, the following factors can also help you determine the right coverage amount:
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.
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.
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.