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How Much Life Insurance Coverage Do I Need?

Life insurance is an indispensable part of one’s life and is important to protect the financial stability of their family members, upon their unexpected death. But there is a common doubt with all policy seekers as to how much insurance they require.

According to industry standards, the value of the total sum insured should be based on the life stage of the policy seeker. Every salaried person should have insurance that accounts for at least 10 to 15 percent of their annual income. Individuals who are above the age of 50 years can have insurance of about 5 to 10 times their annual income. 

How to Calculate How Much Insurance One Requires?

According to industry experts, the life insurance cover should offer at least 12 to 15 times of the annual expenses of the family. But a one size fits all approach cannot be applied for all the people while seeking a life insurance policy.

The policy seeker should perform a thorough analysis of their individual and combined family expenses, their investments, requirements and other liabilities. The following approaches are postulated to learn the quantum of insurance that one actually requires.

1. The Financial Approach Theory

The basic objective of this approach is that the coverage from the life insurance should be sufficient to meet the needs of dependents, in case the breadwinner of the family has to die unexpectedly. The needs mentioned here include financial liabilities such as loans and mortgages and the funds that are required to support children’s education and marriage. 

2. Risk Cover First and Savings Theory

According to this theory, the policyholder should assess their financial needs, considering their life stage, dependents, risk profile, and liabilities. The protection factors include present and future liabilities so that the life of the dependents is not significantly altered if something untoward has to happen for the insured. The savings component focuses on preserving funds for the future of the family. In short, the amount of insurance that one seeks should pay for the debts of the dependents and help them live a quality life.

3. Human Life Value theory

According to this theory, the amount of insurance that one buys is directly proportional to their economic value. These factors vary from one person to another and are the net earning potential of the person for the rest of his working life. 

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4. Underwriters Thumb Rule

The quantum of life insurance is a multiple of annual income, according to the age of the insured. This rule can be understood from the table below:

Age of the Policy Holder

Insurance Required 

20 to 30 years

15 x  current annual income

31 to 40 years

14 x current annual income

41 to 50 years

12 x current annual income

51 to 55 years

8 x current annual income

55 years and above

5 x current annual income

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Bottom Line

Need analysis is the fundamental tool to ascertain how much insurance that one needs. This will also direct the individual towards choosing the right insurance product. The Rule of Thumb is to choose insurance for the protection of self against disability, wealth accumulation for children’s education and marriage, and wealth maintenance to pay for debts and loans. 

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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