Just having some sort of insurance will not suffice, one needs to do a proper adding up.
When it comes to life insurance, there are more chances for one to be under-insured than being adequately insured. A good way to approach life insurance needs is to evaluate your financial situation—your assets and liabilities—to arrive at your net worth. In case you have a negative net worth, which means your financial liabilities outweigh your financial assets, you definitely need life insurance to, at least, cover the liabilities that you have.
However, life insurance is not only meant to meet financial liabilities, it also creates a financial plan for your financial dependents to manage their lives in your absence. Basically, if you have anyone financially dependent on you, you need life insurance. To arrive at the quantum of life insurance that you require, you should start by listing out the various financial responsibilities you need to meet so that you are adequately insured against any risk.
Determine your family’s needs:
Assess how much money is needed by your family to run the household for a year. Multiply this by the number of years you foresee them relying on this money before they are independent. So, if you are 40, have a wife and a 10-year old child who are financially dependent on you, consider leaving enough for them to be able to manage their finances for another 12-14 years. Add any outstanding loans or debts that you may have to this figure. What you get is close to the amount of life insurance you need.
Financial goals:
Chances are, you will be financing your children’s education and you may also have a few other financial goals like a retirement plan for you and your spouse. Add it all up to figure out the estimated amount of money that your survivors would need. You will need this additional sum of insurance so that your family maintains the same quality of life that you have envisaged for them, even in your absence. Add up all your existing financial resources and money that will be available and in case your spouse is employed, factor in that income. Include any payout your dependents may receive from your employer or the provident fund and existing life insurance cover. This amount should be deducted from the life cover that you foresee for the most optimum life insurance policy that you should have.