As you are reading this article I believe that you have recognized the value of life insurance and are in a process of evaluating your insurance needs or looking for a Life Insurance Calculator and I hope you will be signing up for an insurance contract with the best term life insurance company very soon. First things first, let me congratulate you for realizing the value of Insurance and let me take a chance to remind (read warn) you once again that your journey for buying life insurance shouldn’t stop here and I really hope that you will turn your wish to reality and fulfill the commitment of buying term life insurance which is the corner step for securing the future of your family.
Now coming to the main question of this article, how much insurance do you need is always a tricky question and to be honest there is no straight forward answer to this, as a thumb rule many experts will ask you to take at least 10 to 20 times of your current annual package (CTC) but to practise in life that is not the correct way to address the insurance needs. I agree that the views of no two people can be same and it is ideal to assume that we have different answers or thumb rules for this important question. Today let me take a chance to list my views on calculating life insurance needs based on which I hope you will be able to get a conclusion of how much life insurance do you really need?
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Your Earning Capability
Your earning capability to earn can help you in deciding the basic value of life insurance that you should buy and even experts may not be wrong in suggesting 10 to 20 times of your current annual package as life insurance but the thumb rule have its own set of flaws, let me cite an example consider Mr. Chakravarthy aged 30 years earning Rs. 500000 per annul decided to take insurance based on the thumb rule he have to take insurance ranging between Rs. 50 lakhs to Rs. 1 Crore but the flaw here is Mr. Chakravarthy current package is 5 lakhs and he have potential of earning much higher than the current package as years pass by and it will not be outrageous to say that his package could be at least Rs. 7.5 lakhs after 5 years assuming a 10% hike (in simple terms not compounded, even I know that 10% hike every year results the packages after 5 years to Rs. 805255) and after 10 years he will be capable of earning a minimum of 1 million rupees even with moderate hikes. Now returning to the question of insurance required the insurance requirements of Mr. Chakravarthy will be changed after a decade and he should buy insurance again at the age 40 years, thanks to inflation now his family needs much higher corpus in case if something happens to him and they may not be able to keep up their living standard as before with the proceedings from his insurance policy that he took 10 years ago and buying additional insurance again at that age may not practical all the times.
So what is the right figure with respect to the current annual income? For this you should be considering your income after 10 years for people aged between 25 to 35 years or simply (Your Current Annual Income + Minimum of 100%) and for people aged above 35 years the value considered should be the income you are expecting to earn after 5 years or simply (Your Current Annual Income + Minimum of 50%) and multiply the value with the figure that you are comfortable with after considering your life style expenses, bills, education costs, etc. and the way you want your family to lead their lives in your absence (my thumb rule suggestion is to take a 10 multiplier if you are frugal with limited expenses and less discretionary expenses or take a 20 multiplier if your family have high life style expenses with huge discretionary expenses).
Assuming that you don’t have any loans, liabilities to handle and have no plans to avail loans in future you are good to go with above figure and end reading here, for rest continue further.
Consolidate Your Debts & Liabilities
List down all your debts, loans, liabilities (everything is same but mandatory to make a list) and combine that figure and add this figure to the one arrived in above step. Why this? Because your family may not be in a place to pay off your debts and a major chunk of the proceedings from the life insurer may get exhausted for writing off your debts, so it is essential to cover the whole of your debts and get coverage for that amount as well.
Sometimes your current requirements may not fulfill your future needs, you may be married with no kids or a single kid today and you need to be ready to handle the expenses of having a kid or two (sometimes things go beyond your control, pun intended), budgeting for these expenses is one part of financial planning but handling the risk of these costs should be considered while buying your life term insurance policy.
Consider Assets You Own
You keep on adding things all the time and adding up all these stuffs will raise the costs and now it’s time to cut the burden, list down all the assets you or your spouse own (please be generous enough while considering the value for real estate assets) or your family will inherit for sure (like building on the name of your father and you are the only son, which is safe to assume that you inherit) add them up all and just deduct the same figure from the life insurance value you need.
Human Life Value
It is always tough to calculate the Human Life Value (HLV) for which we have emotional attachment but for reasons known to us primarily for peace of mind and to cover the uncertainties that life have in its store for us it is your responsibility to cover financial aspects of your life to safeguard the future of your family.
In financial terms Human Life Value (HLV) is the sum of your lifetime earning capabilities which is certain if you live forever and for us that is not enough while calculating the life insurance value to change it HLV could be defined as follows which in my opinion is the right amount of life insurance you should but today.
HLV = X * 10 Year Average of Your Future Earnings + Your Liabilities + Future Requirements – Assets You Own
Considering all these I hope you will make an informed decision, and I hope that you will be able to make your purchase considering this theory as life insurance calculator.
Between Us: What is your view on my definition of life insurance that is required? Please share your views on this. In case if you have already bought life insurance please calculate yourself if you are adequately insured and in case if you are under insured please take the right steps to increase it further.