How Much Life Insurance Cover Do You Need?

The writer is a Delhi, India based Certified Financial Planner CFPCM, conferred upon by the
Financial Planning Standards Board. If you are an Indian resident looking for a financial plan prepared according to your needs & goals, write to her at shruti(AT)

Understanding your Life Insurance needs is no rocket science. All you have to do is stay logical and follow these steps.

Life insurance is synonymous with protection, the basic purpose of Life Insurance is to ensure that your family does not suffer any financial difficulties in the event of your death. Therefore adequate coverage can’t be compromised with.

Never go for some random numbers. Assuming that opting for ₹50 Lakhs or ₹1 Crore insurance cover is good for you, without any calculation is the biggest mistake you can make.

Your life insurance cover amount should be decided after taking into account the following factors:

      1. Amount of your outstanding Debt
        All your debts must be paid off in full, including your housing loans, car loans, credit cards, or any other mortgages, so that your dependents don’t have to bear the pressure of these debts after you. Therefore if your outstanding debt is 20 lakhs, you need at least 20 lakhs in your policy to cover your debts.
        It’s important to notice that lending institutions have understood the profits margin of insurance companies and are getting in on the act. Credit Card companies and Banks/NBFCs have started to offer insurance deductibles on your outstanding balances. Often this amounts to a few hundred rupees a month and in case of your death, your Housing loan company will recover the remaining instalments themselves from the insurance company they have tied up with.
        If you opt for this coverage, which you should, make sure to subtract that debt from any calculation you are making for your Life Insurance.
      2.  Income Replacement Amount
        This is the biggest deciding factor in the size of your policy. To calculate this let us assume that you are the only provider for your dependent(s) and bring in ₹60,000 monthly. This is ₹7.2 lakhs annually. Now to find income replacement amount you have to multiply your annual salary with the number of years your dependents will need the support, say 13 years, but you also have to take into account inflation/annual salary increase. So increasing salary by 3% every year we arrive at around 1.12 crores.
      3. Planned Future Expenses
        Estimate the cost of future needs like a child’s higher education and wedding expenses etc. (always take inflation into account while estimating future costs). Let’s say a wedding costs ₹40 lakhs and the cost of higher education is ₹25 lakhs. Hence you need to add ₹65 lakhs to your policy amount.
        This final amount of around ₹1.97 crores (1+2+3)  is your total requirement.
      4. Amount of your existing Assets
        Find out the value of your existing assets and subtract the same from your total requirement to arrive at the insurance coverage amount. Let’s say you have cash and savings of ₹2.4 lakhs, investments (like stocks, mutual funds etc) of ₹10.2 lakhs, retirement funds (PPF etc) of ₹7.5 lakhs, existing life insurance cover of ₹5 lakhs & other assets for ₹3.4 lakhs. So, the total existing assets are ₹28.5 lakhs.

      The amount of insurance cover you need based on the example above is around ₹1.69 crores (1.97 crore28.5 lakhs). My advice would be to opt for a term insurance policy with a low premium. Plans like Moneyback do not make sense as I discussed here.

      This example is not a scientific approach – it’s a ballpark calculation. But it’s pretty close to what you need, and it’s a calculation which you can do yourself. And it’s definitely a lot better than a wild guess.


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