How much Life Insurance do you need? In simple terms, Life Insurance should provide your family the same amount of money in case of death that you would provide them if you would remain alive. This is called your Human Life Value or HLV for short.
As an example, let us calculate the Human Life Value of a 35 Years old person who hope to work for the next 20 years till the age of 55. Let us assume that he earns a post tax income of Rs. 50,000 per month i.e. Rs. 6 Lakh per annum.
If we assume that his income will remain constant (we’ll include that part later) and also assume that there is no inflation (prices remain the same over 20 years – impossible I know, we’ll add that aspect too). But just keeping it simple.
If this person dies in an accident today, his family will lose out on
6 Lakh x 20 Years = Rs. 1.2 Crore.
Whoa!
Income Growth
Now, if we assume that his income grows by 7% every year while inflation is 5% on an average over these 20 years, then his income will be even higher since it will grow faster than inflation. Let us call this the Growth Factor.
Thus you should multiply 1.2 Crore by the Growth Factor to get the person’s Human Life Value.
In this case, the Growth Factor will be 1.07^20 – 1.05^20 = 1.22.
Thus, his Human Life Value = 1.2 Crore x 1.22 = Rs. 1.5 Crore approximately.
Ideally, this person’s total life insurance cover should be 1.5 Crore to provide for his family complete protection.
Insurance Amount based on Family Needs
At the least, your Life Insurance policies should take care of your family’s financial needs including Children’s Education, Family’s Regular Expenses, Spouse’s Retirement, Healthcare and any outstanding Loans in case Insurance upto the HLV is not possible.
Insurance companies do comfortably provide cover equivalent to 15-20 times of income for a person of this age. So this person can definitely start with a 1 to 1.2 Crore cover even if not a 1.5 Crore cover. Term Insurance is the best kind of insurance to cover yourself at a very reasonable price.
The policyholder can then step up the cover over a period of time as his income increases.
Next Step
Hope this article helped you to estimate the amount of life insurance plans that you should consider buying. It may be worthwhile to identify the right life insurance products by checking out The Best Term Plans of 2019 as your next step.