How to estimate the total amount of insurance required – what should be the overall value
How much life insurance to take is one of the biggest questions that a person should calculate (and keep on calculating every couple of years); it is also one of the questions that most people do not get right. When you are taking life insurance, the idea is that you are doing some contingency planning for the time when you are not there anymore (and you are not bringing in the money to ensure that your family is able to survive and thrive), and you should be able to do the proper calculation for how much insurance to take. Here are some points for you to take care of:
- The most important point, life insurance is supposed to replace the economic stream that you bring in from the point onwards when you are not there. Hence, the amount should be good enough to replace the overall economic value you will bring in
- You need to factor in increases in salary, so do not just take your current salary levels and do a linear calculation (instead, you should plan for around 10% (or whatever be the value of annual increase you take) increase at a per year level)
- Add in the amounts of money that would have been needed for the large capital expenditure (such as purchase of property, purchase of vehicles, health expenses of elderly parents, expenditure for education of children, marriage, etc). If you don’t do this, you will find that the sum enmarked as insurance amount will prove inadequate as age advances
- Another measure of the insurance amount is to have a lump-sum on which the annual interest or return is enough to meet the annual expenses of your family (such that the capital amount does not get decreased)
- If you already have a housing loan, then the insurance amount should cover the loan amount as well so that your family does not have to meet the EMI’s
- Do a Net Present Value calculation to get the total value
- Think about using a policy where you can pay the entire premium amount initially
Do a lot of care about making sure that you are not under-insured, otherwise, in the tragic case of your death, your family may find the tragedy magnified by an inadequate financial cover.