The 1 Cr Question: How to Calculate Your Life Insurance Needs?
The 1 Cr Question: How to Calculate Your Life Insurance Needs?

Planning your finances is an art that requires prudent decision making on multiple fronts. One of the most important aspects of this planning is purchasing life insurance. While there are multiple types of life insurance available for multiple purposes, namely, ULIPs for market-linked returns, Endowment Plans for accumulating savings, Guaranteed Income Plans for aiding in retirement planning, and so on, the one thing that is common across all is life coverage.

So, the question of how much life coverage you need is bound to come up no matter which type of life insurance plan you are opting for, and this question can be answered in multiple ways. You might think that the widely popular 1Cr Term Plans that you hear about will be enough for anyone, but that is not the case. Life Coverage needs to be personalized for everyone.

In this article, we will look at the different processes that can be followed to determine your ideal life cover, and share one additional tip that will make a big difference in the long run. Let’s begin.

What is Life Coverage?

Simply put, when you purchase any life insurance plan, you are required to pay a premium, against which the insurance company promises to pay a certain amount to your dependents in case of your untimely demise during the policy term. The amount your insurer will pay your nominee in the event of your demise is known as life cover. It is also known as the Sum Assured, Death Benefit, or the Face Value of your policy.

Please note that life cover is one aspect of your policy. Depending on the type of policy, there may be maturity benefits as well, which you receive once the policy term is over.

How to Calculate Ideal Life Cover?

Choosing the right amount of life insurance for your dependents requires a lot of consideration. The amount your policy will pay out in the event of your death, is determined by a number of criteria. You will need a different life coverage amount that will be unique to your situation. A life insurance calculator is often used to determine the monthly or annual premium for an insurance policy. Consequently, it helps you ascertain the real premium you would need to spend to receive the maximum sum assured.

We'll concentrate on four methods to help you calculate how much life insurance you'll need:

Income Replacement Method

The Income Replacement Method is one of the simplest and most direct approaches to determine your life insurance needs. Very simplistically put, life insurance should be able to replace your lost income for your dependents, for a certain stipulated periodin the wake of your death. Suppose you have to do an estimation by this method: first, take your annual income, and then decide the number of years for which your family would need support if something happens to you. You multiply your annual income by the number of years during which, according to rough estimation, you desire to provide for them. For example, a person is earning ₹10 lacs per annum, and he wants to secure his family in his absence for a period of 10 years, he would be needing life cover around ₹1 crore (10 times of ₹10 lacs).

Human Life Value (HLV) Method

Second, we have the HLV method.Thismethod tries to give a broader, if not omni-dimensional view, of the economic value that your life adds foryour dependents. This includes present and future income along with financial obligations, potential savings, and investments. The computation of HLV can be further detailed, including making projections of the future earnings and adjusting them for inflation and other economic variables.

Underwriter’s Rule

The next method is commonly known as the Underwriter's Rule, which quickly helps judge your insurance needs without getting into the hard-core calculations. This rule usually recommends getting covered for at least 10 to 15 times the amount of your annual income.

This is an industry-based rule of thumb and gives a ballpark figure for your life insurance needs. It is a less personalized approach but can serve as a good starting place for those looking for a quick estimate.

Have a Percentage of Your Income as Premium

Lastly, you can set aside apercentage from your income to gotowards the payment of your life insurance premiums. Normally, it is advisable to put aside around 6% of your annual income to pay as premiums, and this can help youpurchase a worthy amount as coverage. This ensures that your purchase of life insurance is within your means but still ensures the cover is substantive. Otherwise, this just helps so many in budgeting for life insurance and makes the service very accessible.

Bonus Tip: Keep Revisiting the Life Coverage!

Because life insurance needs vary over time, it's critical to periodically assess your insurance requirements. Moreover, the procedures mentioned above only provide an indicative value. Your financial situation should guide the final insurance portfolio selection.


Please be aware that the techniques listed above are merely estimates, and the actual amount of your insurance premium will depend on the underwriting procedures used by your insurance provider. We often go above and beyond to save lives when it comes to saving oneself. Getting the right life insurance coverage is therefore a practical and necessary precaution to take, whatever the case may be!

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