How much life insurance coverage do I need

Determining the right amount of life insurance coverage involves evaluating your financial obligations, future goals, and income. Here’s a step-by-step guide to calculate your life insurance needs, followed by an example to clarify each step:

1. Assess Your Financial Obligations and Debts

• Outstanding Debts: Sum up any existing debts, including mortgage, personal loans, and credit card debt, as these will need to be paid off in your absence.
• Income Replacement: Multiply your annual income by the number of years your family would need support if you’re no longer around. This figure typically ranges from 5 to 15 times your annual income, depending on your family’s needs.
• Child Education and Other Milestones: Estimate future costs, such as education, weddings, or other large expenses your dependents may need.
• Daily Living Expenses: Calculate how much your family would need each month for daily living expenses, like food, transportation, and healthcare, then multiply by the number of years you want this coverage to last.

2. Include Final Expenses

• Set aside an amount for funeral and burial costs, typically ₹1-3 lakh (or adjust based on local costs and personal preferences).

3. Consider Your Current Savings and Investments

• Deduct any current assets you have that your family can rely on, such as savings, retirement funds, and investments. The remainder after covering obligations is the insurance coverage you’ll need.

4. Account for Inflation

• Consider adding an inflation adjustment to your coverage to ensure the amount remains adequate over the years. For long-term needs, it’s a good idea to account for 3-6% annual inflation.

Example Calculation

Suppose Raj, age 35, is the primary breadwinner with an annual income of ₹10,00,000. He has a wife and two young children, and he wants his life insurance to cover the following:

1. Income Replacement:

   • Raj wants his family to be financially comfortable for at least 15 years in his absence.
   • Income replacement need: ₹10,00,000 (annual income) × 15 years = ₹1,50,00,000.

2. Outstanding Debts:

   • Mortgage: ₹30,00,000.
   • Personal loan: ₹5,00,000.
   • Total debt coverage needed: ₹30,00,000 + ₹5,00,000 = ₹35,00,000.

3. Child Education and Other Milestones:

   • Education and wedding costs for two children (estimated): ₹10,00,000 per child for education and ₹5,00,000 per child for wedding.
   • Total for milestones: (₹10,00,000 + ₹5,00,000) × 2 = ₹30,00,000.

4. Daily Living Expenses:

   • Raj estimates his family’s monthly living expenses at ₹50,000. He wants this amount covered for 15 years.
   • Total living expenses: ₹50,000 × 12 months × 15 years = ₹90,00,000.

5. Final Expenses:

   • Funeral and associated costs: ₹2,00,000.

6. Current Savings and Investments:

   • Raj has ₹20,00,000 in savings and investments, which his family can use.

Total Coverage Needed

Now, let’s add up the expenses and deduct Raj’s current savings:

1. Income Replacement: ₹1,50,00,000
2. Debts: ₹35,00,000
3. Child Education and Milestones: ₹30,00,000
4. Living Expenses: ₹90,00,000
5. Final Expenses: ₹2,00,000
6. Total Coverage Needed: ₹3,07,00,000 (before savings)

Less Current Savings: ₹20,00,000

Adjusted Total Coverage: ₹3,07,00,000 - ₹20,00,000 = ₹2,87,00,000

Final Considerations

To be cautious, Raj may also account for inflation by increasing the total by about 3-5% annually, especially if he expects the coverage to last for a decade or longer.

Conclusion: Raj should consider a life insurance plan with a coverage amount of approximately ₹3,00,00,000 to ensure his family’s financial security.