If one has dependents to take care of, but insufficient assets to cater to their needs in one’s absence, it’s understood that s/he will need a life insurance policy. However, the next major question which comes up is how can one calculate the worth of their life, i.e. how much money will one need? Although, it’s the kind of question that nobody wants to ask, but when it comes to buying a life insurance, one should certainly be clear of this figure.

There is no denying the fact that the primary purpose of a life coverage policy is to provide financial aid to the policyholder’s dependents in case something unfortunate happens to him/her. Hence, the cover amount should be adequate to clear up all dues and generate a regular income source for the family of the insured.

The amount of life insurance cover that one will need actually depends upon the individual’s circumstances and the type of plan s/he is looking for. For example, one can be looking for a plan to protect one’s mortgage, cover debts, or to provide a lump sum amount to his loved ones to help them maintain their standard of living.

One’s insurance cover amount can be easily calculated using a few basic tips:

How much does one owe?

The amount of debt one has to their name should be an important factor while finalizing the cover amount for a life insurance policy. This is because one would not want to force their family to deal with debt collectors or struggle to make ends meet, thanks to an unpaid debt.

For instance, if Mr Kumar has a debt of Rs 20 lakhs, he should opt for a life insurance plan that will provide at least 50 lakh. This way his family will be able to repay the loan and also be left with a substantial remainder to live their lives comfortably. In order to ensure that his policy will cover the debt, Mr Kumar must regularly pay the interest on his debt to smiddle it from snowballing into a large sum.

How much regular income does one’s dependents need to maintain their standard of living?

Income replacement again plays a vital role in determining the cover amount one is going to need.

Let’s say, Rohit earns Rs 10 lakh a year after tax and other deductions from his salary. In case he is not around, the expenses that were spent on him can be deducted, and hence the required income can be an estimated 80 percent of Rs 10 lakhs, i.e. Rs 8 lakh. In this case, he will need a life insurance policy, which after his investments, will provide his family members with a minimum income of Rs 8 lakhs.

Again, the next crucial part is deciding for how long his family members are going to need this income. In this example, Rs 1 crore as the sum assured should be sufficient for 15 years, and Rs 1.5 crores for the next 25 years, assuming a real rate of inflation at 2.5 per cent annually, in the long term.

Furthermore, to decide the number of years that Rohit must replace his income, he will need to estimate the age at which his investments and savings will make him financially independent. He can either use the traditional retirement age of 60 years or contact a financial advisor to do the calculations for him.

If Rohit’s wife Shikha is also working and he is partially dependent upon her income for his expenses, he can still follow the same principle for the income replacement. All he has to do is account for his wife’s financial contribution to the family while calculating the life cover amount.

Are there any future financial liabilities to take care of?

There may be certain future needs to account for (such as one’s kids’ higher education, wedding, etc.), while calculating the cover amount. One has to estimate the cost involved in these future expenditures and add them to the insurance cover.

It’s also advised that policyholders re-evaluate their life insurance policies periodically to ensure that they have an adequate cover, especially on the occurrence of major life events such as buying a new house against a loan, child’s birth, etc. One can’t follow the ‘one size fits all’ approach to decide the coverage amount policy. Besides one’s personal circumstances, one also needs to have a fair idea of how much s/he can afford to pay in monthly premiums.

There are a range of affordable indemnity policies available in the market offering flexible options to the customers in the form of regular income pay-out or a lump sum amount. By making a few right decisions, one can easily get an affordable life insurance policy.