HOW MUCH IS YOUR LIFE WORTH?
To your financial dependants, that is. There are some settled ways of finding out
People usually try to avoid conversations about buying life insurance. Figuring out how much insurance one needs seems a difficult enough task, let alone deciding which insurance plan would be most suitable. That said, making a smart choice is just a matter of spending time thinking logically about it.
Review your needs
It is sensible to review your insurance needs regularly. An unmarried individual in their twenties might not require insurance, but a married person with dependants probably does, especially if they are also their family’s primary breadwinner. With age, both lifestyles and priorities change—after marriage, for example, many choose to prioritise safeguarding their family’s financial health, especially if there are young children in the picture. Then again, for folks in the later stages of life with settled children, the need for insurance might become less urgent.
How much life insurance do you need?
There are several ways of calculating the insurance cover one needs. Human life value, income replacement and need-based analysis are three commonly used methods, with the last one being the most frequently used.
Need-based analysis is a comprehensive method of calculating the required insurance cover and uses an estimate of a person’s annual outlays. These include rent, children’s education fees and loans and debts, among other expenses. It estimates the amount required to meet a family’s financial obligations in the event of one’s death, and the amount required to sustain the household.
If a 35-year-old who expected to continue earning for another 25 years were to suddenly die, their family would probably not be able to live off their savings for very long. Assuming expenses of Rs 10 lakh per annum, they would need a corpus of Rs 1.15 crore to continue at the same living standard for next 25 years, assuming an interest rate of 8 per cent. If the family also had to pay off a loan of Rs 20 lakh and wanted to save another Rs 20 lakh for future expenses, that would also have to be added, bringing the required cover up to Rs 1.55 crore. Don’t forget to subtract from this figure the amount of existing investments and insurance already purchased.
Life insurance for retired individuals
People over the age of 60 are generally advised not to purchase life insurance, as it is assumed that they no longer have financial dependants. It is usually assumed that a person of this age has already saved enough for retirement, but this might not always be the case.
Insurance costs are much lower when bought at a young age, but require a commitment to long term payments. Experts say that the need-based method offers the best estimate and ensures that you are neither under- nor over-insured. One should also take into account existing loans and future goals while doing the math. Finally, there are many types of life insurance but term insurance is usually the cheapest and most recommended option.