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Life Insurance

How Much Cover Is Needed?

Earlier, we have discussed that the sum assured for any life insurance policy should be ten times your annual income. This is a general thumb rule, but theoretically, the amount of life cover depends on different factors that we will discuss in this section. 


The amount of life cover depends on the following factors in general:

  1. Your age
  2. The amount of Life Insurance coverage you need will depend on many factors such as:
  3. Your life stage (young and married, married with kids, nearing retirement etc..)
  4. Number of dependants on your income
  5. Any outstanding loans (like home loan, car loan, personal loan etc..)
  6. Present lifestyle of your family
  7. Amount of money needed for your children’s education
  8. Amount of money needed for you and your spouse’s post-retirement period
  9. Amount of your assets or net worth already accumulated by you
  10. Your capacity to pay the premium 

You should seek the help of a certified financial planner to understand your insurance needs and suggest the right type of cover


How to calculate the required life insurance cover through the HLV method?


The human life value (HLV) method for calculation of amount of sum assured for which an individual should assure his life takes into consideration the following aspects:

  • Average of present value of the annual future earnings of the individual.
  • The number of years the individual is expected to work before he/she retires.
  • The expenses that are incurred by the individual on him/herself.

Example: Mr. Amit Kumar on an average may earn an annual income of  ₹10,00,000 in future and his expected number of working years is 20. With an annual expenditure of  ₹2,00,000 to be incurred on himself (in the form of maintenance expenses, taxes, etc), the human life value of the person will be:

[(10,00,000 — 2,00,000) * 12]= ₹96,00,000


where, 12 is the inflation adjusted rate of return for 20 years


This means that Mr. Amit, should have a life insurance cover of ₹96 lakhs on his life.

Now from this figure, he should deduct the existing sum assured of the policy plus present value of assets (if any) to arrive at the remaining gap which he should fill by buying a new policy.


Note that you don't need insurance if you don't have dependents.


Life insurance is meant to replace your income and provide financial support to your dependents if something unfortunate happens to you. 

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Units 10/35