Amount of Insurance cover need for your life

Many of you might have wondered how much sum assured do I actually need. Most insurance companies have a formula for checking how much sum assured one needs based on human life value. The following is a simple method I would suggest for evaluating how much sum assured one needs.

Calculate your current liabilities
Your sum assured should include your existing current liabilities. This will provide adequate protection to your family from the burden of loans incase anything unfortunate happens.

Calculate your future liabilities
Your sum assured should include your future liabilities. Some of these future liabilities could be children's education, children's marriage, etc. Has the insured already planned for future liabilities? If you have not planned for future liabilities, then this should also be part of the sum assured.

Future Income Needs
Is the insured the bread earner of the family. If so, the sum assured should be atleast 5 to 15 times the yearly income(this is the case with most people who are employeed/self employeed). This will ensure to an extent that the lifestyle of the family is not that significantly affected. This amount can be any amount that one wishes to provide his family in thier absence to maintain a decent lifestyle.

Total Sum Assured = Current Liabilities + Future Liabilities +Multiple of Future Income

Let me further try to clarify this briefly with a simple example. Ram is a 35 year old software engineer earning a salary of Rs.6,00,000 per annum. He has an outstanding home loan of Rs.15,00,000 which needs to be paid over 15 years. He has a 3 year old son and expects to save Rs.10,00,000 towards his education.

Ram's current liabilities = Rs.15,00,000 (Home Loan)
Ram's future liabilities = Rs.10,00,000 (Son's education)
Future income needs = Rs.30,00,000 (I have considered 5 times gross yearly salary, but this can vary from person to person)

Minimum sum assured Ram requires = Rs.15,00,000 + Rs.10,00,000 + Rs.30,00,000 = Rs.55,00,000

An insurance cover of Rs.55,00,000 will provide adequate security to Ram's family against all his current and future liabilities and will also take care of his families recurring monthly expenses.

Get more information