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    How much life insurance should you carry?

    How much life insurance should you carry?

    How much life insurance should you carry?
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    By CNBCTV18.com Contributor  IST (Updated)

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    While there is a lot of attention on pre-defined goals such as children’s education, buying a home, etc., stabilizing the financial stability of the individuals and their dependents in the long run, often goes missing. This makes the purchase of term plans critical in financial planning.

    In an ever-evolving world where people are constantly chasing their dreams for a happy life at all stages, the uncertainties brought in by the pandemic have changed the way people plan their finances. In the game of investment for fulfilling various goals, insurance often takes a backstage. In recent times, however, there is a steady consideration towards insurance products.
    While there is a lot of attention on pre-defined goals such as children’s education, buying a home, etc., stabilizing the financial stability of the individuals and their dependents in the long run, often goes missing. This makes the purchase of term plans critical in financial planning. Term plans provide higher coverage for a lesser premium paid, hence making it a necessary purchase among other Insurance products.
    How to decide on the life cover?
    While selecting the right term plan is important, choosing the right sum assured becomes key. The sum assured depends upon the Human Life Value (HLV) or the policyholder’s financial worth. This includes income, expenses, future responsibilities and liabilities, and financial goals at various life stages. In the case of an unfortunate event, an amount equivalent to the HLV is given to the sum assured’s dependents.
    While each individual has a different set of goals that differ basis their age, priorities and responsibilities, and financial position, it is always better to keep a broader bracket for the life cover to secure the well-being of the family. Calculating term covers has no one rule, but there are different ways to know how much would be sufficient to provide a smooth and hurdle-free life to the dependents and may come in handy to pay off any liabilities that the life assured may have.
    A basic way to calculate the income replacement value is:
    Current annual income x years left to retirement. For example, if the policyholder is 40 years old with a yearly salary of Rs 15 lakh and plans to retire at the age of 60 years, the cover required will be: (current annual income) Rs 15 lakh x (numbers of years left to retire) 20 = Rs 3 crore.
    This formula presents a very generic sight into the broad cover that the policyholder needs because it does not take into account the marital status, present investments, or if there is any debt to be paid. The sum assured should also take into account the future goals of the policyholder, which may fall on the family in case of his/her demise. It's, hence, advisable to rely on scientific methods of calculating the sum assured to ensure that in the unfortunate event of the policyholder's death, his or her dependents receive adequate cover and are financially secure.
    Let us take all the key factors that help determine the right coverage while purchasing a term plan:
    The first factor to consider is the family’s monthly expenses. Suppose the expense is INR 50,000. To get an idea of the monthly amount that the family will need to run the house in the absence of constant incoming finance, multiply it by 150. The figure we have now is Rs 7,500,000.
    Add to this figure, any loan or debt that is in the bucket of liabilities. Suppose the policyholder has an outstanding amount of Rs 30 lakh as a part of a home loan. The added figure now is Rs 1,05,00,000. Add in all the future goals that the policyholder may have, for example keeping a corpus of Rs 80,00,000 for the spouse for a comfortable post-retirement life. To the fresh figure obtained Rs 1,85,00,000, deduct all the liquid assets. Suppose investments worth INR 20,00,000 are already made. This is the amount that the dependents of the policyholder will immediately get upon his/her demise. The final amount that we get is Rs 1,65,00,000. It will be a safe game to round off this figure and opt for a sum assured of Rs 2 crore.
    Buying a term plan is of utmost importance in the present day, keeping in mind the fact that the life goals of an individual are constantly evolving. Therefore, it is advised to calculate the sum assured at major intervals of life and choose the plan to give assurance and security to the loved ones forever.
    The author, Sanjay Tiwari, is Director - Strategy at Exide Life Insurance. The views expressed are personal
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