How can I calculate the amount of life insurance that I need?
Ramesh Vangal, Mumbai
It is a very important question and the basis on which one must take life insurance cover. There are a few ways in which you could calculate the life insurance cover that you need. The simplest method is ‘Income Replacement’ method, which is based on your current annual income. In this case, the insurance needs = (annual income) X (number of years left for retirement). For instance, if your annual income is Rs 5 lakh and you are 45 today with another 15 years to retire; in this case your insurance cover works to Rs 75 lakh.
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You could also deploy the needs analysis to arrive at the quantum of life cover that you need. In this method, you make a calculated assessment of the most critical factors, such as your family needs based on the number of dependents you have and their monthly fixed expenses. Other major factors to be provided for are: loans (car loan, home loan, etc), kind of lifestyle you want to provide, provision for non-working spouse who would no longer get an income, children’s education and marriage. The next step is to sum up your existing current assets and deduct the amount required in the event of unforeseen death. This is the shortfall (considering that you die today) that you will need to get covered and shall be amount for which life insurance cover is required. But do note that invested assets exclude residence, car and other fixed assets as the family continues to require them and may not liquidate them in the event of your death.
