How Much Life Insurance Do I Need?

Life Insurance is an incredibly critical component of financial planning that creates a safety net for your loved ones. It isn’t just another policy but a promise to protect your family’s financial future when you’re not around. While this policy is beneficial, underinsuring won’t help your family the way you desire. It can leave them vulnerable to debts, lowered standard of living, and various other financial hardships.
If you don’t want your family to face such challenges, focus on choosing the right Life Insurance coverage.

This blog covers all the relevant factors, including financial situation, family needs, future goals, etc., to help you determine the ideal coverage for optimal benefits.

Factors to Consider While Determining Life Insurance Needs

Current Financial Situations

The first step of proper Life Insurance financial planning is assessing your current financial situation, including income, debts, and other financial obligations. This assessment will help you determine how much money your dependents will need to maintain their standard of living even if you’re not around.

You can evaluate all existing financial liabilities like personal loans, mortgages, etc., and factor them into coverage so your family isn’t burdened with its repayment after your demise. Similarly, check all your existing savings and insurance policies to identify any coverage gaps that require attention.

You can explore our various savings plans and protection plans to fill any existing coverage gap. When you align your permanent Life Insurance coverage with your financial reality, you become successful at creating tailored financial security for your family that can replace your regular income in unfortunate events like death.

Family’s Financial Needs

Accounting for your family’s future financial needs is essential in the Life Insurance planning stage. It ensures their long-term financial security in your absence. You can start by identifying their current and future expenses. Their immediate needs may include daily expenses like groceries, utilities, rent, etc., whereas future needs may include a child’s higher education expenses, children’s marriage, spouse’s retirement, etc. 
If your monthly expenses are ₹60,000 and you want to cover your family for the next 20 years, your average Life Insurance coverage must be ₹1.44 crore (₹60,000 x 12 months x 20). This amount will cover their future immediate needs.

You can then add the expected education, marriage, retirement, etc., expenses to the ₹1.44 crore figure to identify the coverage right for your family. If you’re overwhelmed with calculations, use an online Life Insurance calculator to ease the process.

Lifestyle and Long-Term Goals

If your family is used to living a comfortable and rather luxurious lifestyle, your Life Insurance coverage must be high enough to help your family sustain this lifestyle in your absence. You should also make financial provisions to achieve long-term goals like buying a house, building a large fund for a child’s higher education and covering expenses for a child’s marriage.

List the financials required to support your family’s lifestyle for a particular period and add estimated expenses needed to fulfil long-term goals to find the right coverage. Consider using a reliable Life Insurance coverage calculator for convenience. You can also explore our child plans, retirement plans, and investment plans to complement your Life Insurance coverage and financial goals.    

Methods for Calculating Life Insurance Needs

Income Replacement Method

It is the most straightforward approach to determining Life Insurance needs. You can use it to determine Life Insurance coverage by multiplying your current gross annual income with the remaining retirement years. For example, if you currently earn ₹10,00,000 per annum and there are 25 years left for your retirement, you should take a coverage of approximately ₹2.5 crore (₹10,00,000 per annum x 25 years).

In the unfortunate event of your death, this coverage will act as the perfect replacement for your regular income, helping your family live comfortably. You can factor in inflation to ensure the purchasing power of your income doesn’t depreciate over the years.

If you’re looking for the best policy that offers good coverage with the potential for growth and savings, then explore our Shriram Life Growth Plus plan. It features various benefits like market-linked earnings, death benefit, riders for additional protection, coverage for minors, etc.

DIME Method

Determining Life Insurance needs is easier with the DIME method. It is a more comprehensive approach that factors an individual’s debt, income, mortgage, and education expenses to find the appropriate Life Insurance coverage.

You can use the following steps to calculate coverage using the DIME method:

• Add all your existing debts (excluding mortgage) that your family would need to pay when you’re not around.
• Calculate the income your family will need to live comfortably. Multiply your annual income by the number of years you want them to receive financial support.
• List all outstanding amounts of your home loan or other property loans.
• Estimate education costs for your children and other dependents.
• Now, add all these expenses in each category to find the coverage.

For example, if you have a debt of ₹17 lakhs, income replacement need of ₹1.2 crores (annual income of ₹12 lakhs x dependency period of 10 years), pending mortgage balance of ₹ 40 lakhs, and a child’s future education estimate of ₹25 lakhs, your ideal coverage comes to ₹2.02 crores.

Rule of Thumb

You can use the rule of thumb if you prefer simple methods to calculate permanent Life Insurance coverage. One of the most popular rules of thumb is multiplying annual income by a particular factor, typically the number of years the individual wants to provide financial support even after his death. For example, if you earn ₹15 lakh per annum and wish to secure your family’s future for at least 20 years, your coverage comes to ₹3 crore.

Alternatively, you can multiply the income by 12 or 15 so your family receives a lump sum to sustain their lifestyle and comfortably fulfil all major life goals. While this rule is simple, its biggest disadvantage is it doesn’t factor in other financial obligations, inflation, etc. It may result in underinsurance, so calculate the coverage wisely.

Once you’ve identified the coverage, you can invest in our Shriram Life Assured Income Plan to aid your family’s financial needs. It can complement your Life Insurance coverage with its unique features like assured income, higher returns for higher terms, Life Insurance coverage, etc.

Using Online Tools and Consulting Experts

Life Insurance planning can be overwhelming for many individuals. If you’re unable to arrive at a coverage calculation even after trying the methods discussed above, then use our Human Life Value (HLV) calculator. It will factor in your age, income, pending years for retirement, inflation, etc., to help you get a rough coverage estimate. You can also consult professional financial planners to get personalized guidance. They will help you choose the right coverage and investment plans that align with your long-term goals.

Conclusion

Every individual must prioritize Life Insurance financial planning to secure their family’s financial future in the unfortunate event of their death. It will ensure the family continues living a comfortable life and doesn’t encounter financial hardships. However, you must choose the right coverage to create an adequate safety net. Consider the factors and coverage calculation methods discussed in this article to get the correct coverage estimates for your family.

Besides looking for simple insurance plans, invest in policies that offer dual benefits for your family’s betterment. For example, our Shriram life New Shri Vidya plan provides the best of savings and child plans. It is designed to support your child’s educational dreams while providing death benefits, savings creation, additional bonuses, etc. You can also explore our other insurance plans to create a diversified coverage pool for your family.