A Life Insurance policy ensures that your family is financially secure in your absence. It protects your family from financial distress or loss of income even if tomorrow you are no longer around to care for them. How much life cover should I take? The answer for this question lies in more questions- In my absence, how much money does my family need to survive till they become self-sufficient? Do I have any loans or liabilities? Am I the sole breadwinner of my family? What is my children’s age? What are the monthly expenses of my family? What is the inflation rate? etc.
Experts believe that an individual needs a life insurance policy with sum assured value of around 7-10 times of his/her annual income. However, there are also other factors that you need to check before you lock your life insurance cover.
Many insurance providers make use of calculators to know Human Life Value (HLV). It provides the worth of your life in monetary terms. It determines your Life Insurance needs on the basis of various factors like Income, Expenses, Liabilities and Investments. An ideal HLV calculator takes into consideration the following factors before calculating your life cover:
1. Annual income required by your dependants in case of your death (excluding other source of income, if any)
2. Inflation rate: Assuming an inflation rate of 7% p.a., the value of Rs 10 lacs will be 3.63 lacs after 15 years
3. Present value of all your investments
4. Expected return on investment (%)
5. Number of years that you want to provide income to your family
6. Any outstanding loans that your family would have to repay
Example: Let us consider a scenario wherein Mr. Arpit Gupta aged 30 years, Software Engineer is the breadwinner of his family. He is looking for a Term Insurance Plan and needs to know the ideal life cover that he should opt for and the approximate premium that he needs to pay for the same.
Now, before deciding on the life cover, it is also important to consider the inflation rate, present value of his income after 30 years (assuming that he retires at 60 years of his age) and the outstanding balance of loans taken, which will need to be repaid by family members in the event of his demise. Let us assume his monthly income, expenses etc. are as follows:
[table id=13 /]
Based on the above factors, the estimated life value of Arpit Gupta is Rs 1.02 crores (considering the future value of his income, expenses, investment and liability after factoring inflation rate of 5%).The Human Life Value (HLV) Calculator that is easily available online can be used to find out the Life Value of Arpit Gupta in monetary terms.
HLV is nothing but the numeric way to know the ideal life cover. An individual’s HLV is typically expressed in terms of multiples of his or her annual income. Other than the method shown above (the inflation and present value of money), some insurance providers consider a simple way to calculate the HLV. The following table gives an approximate HLV multiple value (on the lower side) for different age bands without factoring the liabilities of an individual:[table id=12 /]
*Please note that the above HLV factor is only indicative and does not consider the liabilities of an individual. The policyholder should consult his insurance provider to check the actual cover provided.
Your ideal life insurance cover is nothing but the financial worth of your life. A life insurance should never be considered as an investment option. It should be purchased purely to protect your family against any unforeseen events in life and to avoid rainy days in your absence. When it comes to investing your funds, a plethora of options are available but for buying a life insurance, nothing but a pure Term Plan should be preferred.
Insurance Tip: An ideal time to buy life insurance is when you are healthy because you will pay less.