- Your income also decides how much life insurance cover you need
- The amount of your life insurance cover should be enough to replace your income when you are not around
- In case you do not know how much life insurance cover is needed, use a human life value calculator
When you buy life insurance, the amount of life cover (or Sum Assured) you choose should be enough to replace your income and financially support your family when you are not around. As a thumb rule, an amount equal to 20 times your annual income is recommended as the life insurance cover you should have. Hence, when your salary increases, the life insurance cover that you have must also increase.
Ideal way to ascertain your life insurance cover requirement is by using a Human Life Value Calculator (or HLV Calculator). Use here. Human Life Value is the amount that will help your family maintain the same standard of living as they are living now even when you are not around; they should be able to pay all the outstanding loans and should be able to achieve financial goals. It is natural that with an increase in salary, the standard of living of your family increases and so do your expenses. In your absence, a higher sum assured will help your family live the same standard of living as they are accustomed to.
Why reviewing your life cover amount is important?
A periodic review of the life insurance cover is important to assess whether it is sufficient based on your current situation and phase of life.
Let us take the example of Mihir, a 35 year old IT professional. He lives with his wife and a 5-year-old son in Mumbai.
Eight years ago, when Mihir was a bachelor, he bought a Term Insurance Policy with a sum assured of ₹50 lakh.
Mihir is now married with a kid and over last 8 years, he has achieved several professional milestones. His annual income has gradually increased 10 times from what he had started his career. His standard of living and expenses have also increased accordingly. He took loans to buy his house as well as a car.
His current financial goal is to plan for his child’s future. Considering the rising inflation, he has estimated an amount of ₹80 lakhs for his son’s higher education. In addition, he wants to save approximately ₹40 lakhs for his son’s wedding.
As seen in the table below, Mihir’ s current life insurance cover is grossly inadequate with a shortfall of ₹ 1,60,00,000. Under this current scenario, his family might not be able to meet these financial goals and pay off the loans. Therefore, Mihir must consider buying a higher life insurance cover to cover the shortfall.
|
Goals/ Liabilities
|
Amount (in ₹)
|
|
Housing Loan
|
80,00,000
|
|
Car Loan
|
10,00,000
|
|
Child Education Corpus
|
80,00,000
|
|
Child Wedding Corpus
|
40,00,000
|
|
Total (A)
|
2,10,00,000
|
|
Existing Life Insurance (B)
|
50,00,000
|
|
Life insurance Shortfall (A - B)
|
1,60,00,000
|
Important steps to review your life insurance cover!
If you have multiple life insurance policies, the easiest way to review is to create a list of all policies and add the life cover (or sum assured) under each policy to arrive at the total life insurance cover. The next thing to do is use a Human Life Value Calculator to estimate your current life insurance needs. As a last step, make sure you buy life cover for the additional amount. You can consult your life insurance advisor to help you with a suitable plan.
Exide Life Insurance offers plans like Exide Life Smart Term, Exide Life Elite Term Plan to help you bridge your life insurance requirement. Read here.
