Life insurance is nothing but the insurance covered for your life. In case of death, the sum assured is given to the nominees. But most of the people don’t know that how much insurance is required or enough for them. There is no single formula for estimating your life insurance needs.

However, we can consider various methods to calculate an individual’s need for life insurance.

• Rule of thumb

Most people rely on the rules of thumb since it is a simple to calculate and easy to understand that helps to calculate a basic amount of insurance coverage.  Mostly common rule of thumb is used as “Income rule” which provides a guideline to assess the insurance need of an earning individual. It uses a basic multiple of income as always heard that 10-15 times of yearly income should be covered. Though the rules of thumb method is quite simple, it does not factor the needs and circumstances of each family and you could end up overinsured or underinsured.

• Human Life Value(HLV) Approach

The Human Life Value or income replacement approach or the Capital Needs Analysis is a method to determine an estimation of person’s human life value.  The income replacement calculation is based on the theory that the purpose of insurance is to replace the loss of earning when a person dies. Simple put HLV is calculated based on the individual’s income earning ability.

Steps to calculate Human Life Value

Step 1: Find the current income of bread earner
Step 2: Deduct his personal expenses, income tax, and life insurance premium
Step 3: Find the earning life of the bread earner from current age
Step 4: Find out the present value of required income stream by using inflation adjust return

• Need Approach

It is based on the assumption that the goal of life insurance is to cover the surviving family members’ immediate expense after the insured family member’s death as well as their ongoing expenses into the future. While HLV focuses on the income that would be lost, the needs approach attempts to identify the allocation of that income and to determine the purposes to which it would have been put.
Need analysis has general equation is:

Life Insurance = Cash needs + Present value of Net income needs – Expected available assets


Life insurance is designed mainly to protect the beneficiaries’ standard of living in the event of the untimely death of wage earner. Through life insurance, the beneficiaries will have the financial resources to protect their future income and pay for immediate and future financial obligations. We need life insurance if our financial obligations at the time of death exceed our financial assets.
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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at
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