How much life insurance protection do you require?

After deciding you need life insurance, the next big question is how much protection to get. Your loved ones won’t be financially secure in your absence unless you invest in sufficient insurance.

Human life value (HLV) calculations can help you determine enough coverage, but you can also use some handy rules of thumb. Calculators that take into account both income and expenses might help you zero in on the right level of protection.

Here is a quick primer on the basics of life insurance that should help you determine if you have enough coverage (or “sum assured”) to safeguard your loved ones’ financial security in the event of your untimely demise.

Annual salary

Your yearly salary is one standard by which life insurance coverage is measured. Life insurance with a face value that is 10 times your annual pay is the industry standard. This, however, may not always be enough.

Policybazaar.com’s head of term insurance, Rishabh Garg, advises purchasing a policy with a face value that is 10–20 times your annual income. Let’s pretend your annual income is 10,000,000 Indian Rupees and your costs are 600,000. Your spending will double every decade if inflation is assumed to be 7.5%. The total amount required to cover costs for the next two decades is then Rs 1.8 crore (60 million plus 1.2 million). That’s equivalent to 18 times your yearly income right now.

While a multiple of 10-12 times may be appropriate for those with a larger wealth and asset base, Garg suggests that a multiple of 15-20 times may be more appropriate for those with lesser earnings.

Age

Life insurance is meant to protect your loved ones financially in the event of your untimely death by replacing the income you would have provided during your prime earning years. The average person purchases a life insurance policy that will pay out until they are between the ages of 60 and 65, i.e., during their productive working years.

The purpose of life insurance is to safeguard the breadwinner while he’s still bringing in a salary. A good rule of thumb is to add 10 years till age 60. According to Kalpesh Ashar, a certified financial planner, the premium will increase if you go beyond that amount.

Your need for life insurance may start out quite low, but as you reach specific life-stages (e.g., marriage, having children), that need is very likely to increase. It’s possible that your income and savings won’t be sufficient to support your family at that point. Then, as you pay off debt and add to your savings and assets, you may find that you don’t need as much life insurance.

If you’re between the ages of 35 and 40, you can get 15 times your annual income in life insurance. Suresh Sadagopan, managing director of Ladder7 Wealth Planners, has observed, “Beyond 40 years of age, a cover of 10-12 times your income may be enough.”

Expenses and goals

While your annual salary and present age may serve as a starting point for estimating your need for life insurance, Sadagopan advises looking further afield. Spending habits are more important than income levels.

“We go by expenses and goal replacement,” Sadagopan explained. How much money will a family need to cover their fixed costs and pursue their numerous life goals (such as sending their kids to college or buying a house) over the next two decades? There has to be an inflation adjustment made to this sum. You may calculate how much money you’ll need by adding your debts, such loans, to your available liquid assets, like savings and property.

The quantity assured should include any outstanding loans, in this case Rs 50 lakh. You need to add Rs 20 lakh or a smaller sum to your calculations if you have already saved Rs 10 lakh of a targeted Rs 30 lakh for your child’s education. Investing the Rs 10 lakh wisely can allow it to develop into a larger sum if your child’s education is still a few years away.

However, if you have savings or fixed deposits worth Rs 30 lakh, you can deduct that amount from your sum assured.

Ashar proposes splitting the difference between family costs and liabilities like a mortgage by purchasing two insurance. That way, everyone in the family can see exactly how much money is set aside for which expenses.

Working spouse

Whether or not both couples are employed and contributing financially is another consideration.

Since both spouses’ wages are being put toward the family’s costs, Ashar suggests they each invest in adequate protection.

If you have a working spouse, it might make sense to get a cheaper life insurance policy. But in reality, Sadagopan said, families with two incomes have various lifestyle goals that must be considered when purchasing life insurance. In the event of either parent’s untimely death, the family’s financial future must be guaranteed with enough life insurance.

Your life insurance cover (sum assured) should ideally be determined using an estimate of your total expenses, but you can get a rough estimate by using a multiple of your annual income. Professionals recommend an amount no higher than 15 times your annual salary.

You should also check your life insurance policy every few years, and certainly after any significant life changes. What is the appropriate sum promised today may not be so in a few years as your spending, goals, and aspirations have likely changed.