How to calculate exactly how much insurance you need?

How to calculate exactly how much insurance you need?

Deciding to get insurance is a big step in your life. You are taking one of the most major decisions of life, one that directly affects the life and financial security of your loved ones in case of any unfortunate incident. It also means that you are going to be setting aside a sum of money out of your budget and want to get the best possible returns on the money you are spending. All of these and many more factors go into deciding the one big point you need to figure out now that you have decided to invest in insurance, which is “Exactly how much insurance do you need?”. While it may seem like a task on which you would need a lot of advice on, it is a fairly simple calculation based on a few factors, which are listed below.

1. Know your income


First and the most obvious point of all, the insurance you can afford directly correlates to your current income. Based on what you are earning you will be able to calculate the amount for the life insurance you can buy. A certain percentage of your income is covered in the policy, generally somewhere between 75-80%. Another factor that comes into the picture here is the estimated family income apart from yours. If there is another source of income in the family, which needs to be subtracted from the percentage of your salary that you want covered. Then multiply the monthly figure by 12 to annualize the amount. Last step is to multiply the annual amount by the number of years that you want your family to have the replacement income for. The formula so far is {[% of monthly income to be covered – other income/savings per month] x 12} x number of years your family needs the replacement income

2. Calculate your family’s one-time expenses

 

Throughout your life, there are quite a few occasions that you already marked in your head and want to plan for. You want to be around for each one of them and make sure that you are a part of each of these special memories with your family. However, in case of an unfortunate event, there is no way that you would want your family to be comfortable and happy in each situation. Events like your children’s college education, their weddings, loan pay-offs and all the other onetime events that you can think of should be considered. An estimated total of these expenses should be added to the amount for which you want to seek cover for. This gives you a total amount of insurance cover requirement you will have. The formula now stands at
{[(% of monthly income to be covered – other income/savings per month) x 12] x number of years your family needs the replacement income} + One-time expenses

3. Calculate your existing assets

The last step of the calculation you can do is to do a roundup on your existing assets. All of your investments need to be taken consideration for this step. So things like, property you own, investment folios (mutual funds, FDs, retirement plans and more) and even cash savings must be taken into consideration for the calculation. Once you have an idea of the assets you own, you can simply reduce the amount from the cover requirement amount and apply for the life insurance cover.

The final formula stands at:
{[(% of monthly income to be covered – other income/savings per month) x 12] x number of years your family needs the replacement income} + Onetime expenses – total existing assets

We never want to think of the worst case scenarios, but it is always better to be prepared for them. Getting life insurance is one such preparation and getting the right amount life insurance is one of the most important security blankets that you can provide for your family and their happiness.

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