How much life insurance do I need?

There are no clear answer to this question which is in the top of mind question for anybody who looks at any kind of insurance (life or general). However, we can see why we buy life insurance:

We buy life insurance to replace income lost due to the death of the breadwinner. The amount of life insurance you need depends on the ‘income stream’ you would want to continue for your family if anything happened to you.

Let’s say you earn Rs.3,000,000 a year. This money provides your family’s lifestyle and standard of living. As long as you are alive and well, your loved ones will remain financially secure.  What happens when the breadwinner (read ‘You’) are no longer able to earn this money?

Bluntly, if you died tonight, what would your family do?

How would they pay the home loan EMI, car loan, society charges, utilities, taxes and other bills? Where would the money come from for new clothes for your children, for college fees, or even for your spouse to enjoy an evening out with friends?

Very few people are comfortable answering this question. They live like they will never die and most will die like they never lived. When you have lived a good life, and have a family that you ‘love’ your answers have to be far, far better than these… That’s why we buy life insurance. So that the answer to that question is, without hesitation or doubt: “They’ll be provided for.”How much life insurance do you need? The chart below shows the annual income the insurance proceeds can generate based on the following assumptions:

The beginning amount will earn a 5% return after taxes, with principal and interest depleted in 20 years by withdrawing an amount equal to 8% of the original principal every year. Note that different assumptions will generate different results.

Example: A life insurance death benefit of Rs.30,000,000 would provide your family with an income stream of Rs.1,500,000 a year for a 20-year period, after which the entire amount would be depleted. So, if you earn Rs.800,000 a year, you may wish to consider Rs.10,000,000 of life insurance. How expensive is that? That depends on a number of factors, including your age, health and personal habits (such as whether or not you smoke), and type of insurance.You have several insurance options, depending on need, budget and situation.

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3 Responses to “How much life insurance do I need?”

  1. paramjit singh on June 3rd, 2008 at 2:48 pm

    nice to know..but should you work on thumb rules or work on actual need. I met an advisor who suggested an astronomical figure – as a unit linked plan. I later on found that the bank dealt only with unit linked plans – and no pure death plans!! Please clarify this.

  2. “Life Insurance ” is a gurantee when you died and your family can get some money to pay for expense in a period of time not for all. The amount of money that’s your family received depend on type of insurance. I think only one is just enough.

  3. If you died tonight what will your family do? I think that is a good line and a hard hitting line. A good wake up call and a reminder to keep our life insurane policies in force!

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