Estimating Life Insurance Coverage required for an Individual

Estimate How much Life Insurance Coverage required for an Individual with examples...

Total required…….10 times the annual income. when talking about insurance financial planners suggestions are how much is the required? How to calculate it when buying a policy. What should be considered during buying a policy?

Let us know, If we ask about any life insurance policy we frequently hear four to five policies. In truth less are the people who think are these enough, to escape interest or due to obligation with a friend people buy policy.

In adverse times the person who is responsible for whole family must pay required in policy where the mount of Insurance policy depends on many factors like Age, dependants, income, annual expenditure, house, vehicles, other loans, savings, lifestyle and amount required in future in these way considered how much insurance should be bought is clarified.

Choosing an Insurance Policy

Generally if anyone wants to buy a insurance policy financial planners suggests the policy should be 8 to 10 times the annual income. If we look at it in a way it is apt, but the same formula cannot be implemented in all situations. Young people who have no dependents doesn’t require the above policy, but for studies and everything it costed their parents a lot and in case of sudden death it is almost impossible to console parent’s agony.

There should be a financial support in some way, so as soon as one started earning, buying a policy where it is 8 to 10 times the income is a good idea. Every individual’s financial position, necessities are varied and many people look at premium before buying a policy, they choose policy taking into account and the amount of premium, even though there will be no loss in the present but in future it is not much useful but remembering this one should decide the total of insurance policy.

Scientific methods are available depending on Income

This Policy method depends on your current income.

The formula followed should be Insurance policy = Annual income* Amount of time left to resign( in years).

For example A person’s age is 35 years. Years left for him to resign is 23 years. Let annual income be 3 lakhs, then required Policy total Rs.3,00,000*2 = Rs.69,00,000.

Depending on Income there is another method to take policy

At least it should be 10 times the income and this also changes according to age group. People under age 20-30 years 5 to 10 times. 30-40 years aged 15-20 times. 40-50 years aged 10-15 times. 50-60 years aged 5-10 times the annual income, policy should be taken by not only income …house, vehicle loans other debts should decide the value of policy to buy.

Depending on the Value of Life 

We cannot measure a person’s life with money, but who will fulfill his/her responsibilities? that’s why every individual has financial value, certain methods are there to calculate, most importantly how much an individual will earn in future, expenditure on raising a family are considered.

Example:- Ramu is 40 years old and he will resign his job when he is 60 years, his current income is Rs.3,50,000, his personal expenditures, additional taxes, life insurance policy makes Rs.1,25,000, It means Rs.2,25,000 is still remaining for family, so we can take Ramu’s annual value as Rs.2,25,000. In case of sudden death or accident to Ramu at 41 years there will be no income to the family.

How will the family survive and how much policy should Ramu buy?

Let’s calculate

Family is getting Rs.2,25,000 from Ramu’s total income. So in the future 20 years the same amount Rs.2,25,000*20 years = Rs.45,00,000, but the total amount is for next 20 years so the present value for it should be considered.

Assuming with an yearly 8 percent income required total will be Rs.23,85,000, most of the financial planners suggests choosing policies by taking in account necessities and this formula should be considered for people who want to buy a insurance policy, this makes it easy.

What about Premium?

When we look at policy all we can see is big figures, how to pay premium for this? This doubt may arise. Presently Insurance companies are giving low premium term policies with more coverage and it is possible to buy huge policy with low premium. People below 30 years can buy a policy of one crore with a premium of Rs.10,000 per year. Buying a policy which is 3 percent in earnings is a back up in future in case of sudden death to the family and it should be observed that one to two lakhs policies are only for name sake but not face-saving.

Important Note: Necessities, Income, Expenditure always increases with time therefore for every 3 years policies are to be supervised.

Necessities are Important

What are your family necessities? Responsibilities? Should be calculated before buying a policy. Following points should be considered for this.

• Responsibilities : what is the lifestyle of your family? Children’s education, Marriage, Financially supporting parents other expenditures.
• Amount required in Emergency: House, marriage, education loans, emergency fund.
• Montly expenditure: Family expenditure (house rent, groceries, children’s expenditure etc) If your spouse is also earning both incomes should be considered where if one person stops earning how much it lessen. (for example Rs.50,000 is the monthly expenditure income of your spouse income is Rs.30,000 so Rs.20,000 will be less). How long is it required should be made out.
• Investments,other incomes: Savings, Income through Job, Income from House Rents assets received after death should be identified. Adding up investments, assets, other profits and subtracting it from necessities the amount we get is the policy required.

Shyam is 37 years old, his wife is a house maker aged 35 years, who has 8 years old daughter keerthana, excluding taxes his annual income is 4 lakhs and his montly expenditure is Rs.12,000. Keerthana school fee is Rs.20,000 and he has Rs.10,00,000 loan on house. EMI of the house loan is Rs.10,000. Considering his necessities, investments, will calculate the suitable policy.

If we observe the table Rs.87,22,657 is the necessity and Rs.11,75,000 is total properties/investments. The difference between them is Rs.71,47,657. Shyam already took 10 lakhs loan on house if we remove it Rs.61,47,657 is required. By this we can understand if something happens to shyam his family requires Rs.58,87,65. So with all the above facts and examples, we all required to estimate the insurance coverage what we actually required.