Mostly, people concentration lies in picking the best life insurance product from the best insurance company but without any evaluation of adequate insurance coverage.  While contacted by readers who tend to generally ask us very generic common question: Tell me which company or insurance plan is the best suited? But one chief question, they never ever asked us before buying a life insurance policy is: how much life insurance do I need? They come up with own lump sum calculated amount for their insurance coverage such as 20lakhs, 50 lakhs, 80lakhs, or 1crore etc. In that way, underestimation of life cover could result in the family not being financially self-sufficient in the event of the unfortunate death of the policyholder and chief income earner or over-estimation insurance cover which would mean higher outgo of premiums at the cost of other necessary life stages and lifestyle spends.

Consider Only Term Insurance

First of all, we will talk about only term insurance. Needless to say, the key to financial planning is to buy only term life insurance is that the way to go. Other types of policies tie a subpar investment into the insurance policy. If you want to invest, invest separately with a company that specializes in investments and will customize an investment to meet your needs.


Key factors to determine coverage

One of the key factors to consider is what kind of lifestyle you want your family to have in case of your sudden demise. How much financial impact will your death cause to your family? Do you want them to be filthy rich if you die? Do you want your spouse to continue to work? Do you want them to be debt free? Is it important that they keep the same house? Will they be fine without any insurance?

The amount of insurance you might need/want will vary widely depending on your current financial situation.

Let’s look at following three generic family financial situations.

Family Financial Situation one: Not everyone needs life insurance.

For starters, people who have been self-disciplined savers throughout their lives often have no need for life insurance as they’ve accumulated enough wealth on their own to sustain their family. Similarly, people with no dependents often have little need for life insurance if they have much cash in the bank at all, for instance, day, and today medical and just to cover funeral expenses. Life insurance is only necessary if, in the event of your death, people would be left in a financial bind without some sort of resource.

Family Financial Situation two:  Want enough insurance to cover a specific use and don’t need any insurance to provide future income for your spouse.

This is the situation where a couple both are working and earning decent income and have no kids. In that case, they may decided to get suffice cover to pay of all debts, if any, at which point the  survivor should be fine since they’ll keep working. In this case, their calculation looks pretty easy. Just add the amounts of debts and whatever other costs they want to cover, and that’s how much insurance they need. But, the problem, of course, is that the amount of debt they have now and the amount of debt they have in 10 years will be quite different. Hopefully, they’ll owe less in 10 years! There isn’t a lot you can do about this other than buy different terms of insurance.

Example: Ajay and Neha both have good jobs and will continue to work till their retirement age. They have taken home loan Rs30 lakh. They’ve decided that they’d like to have enough insurance to cover their home loan. Since, their home loan is Rs30 lakh so they decide to get Rs20 lakh of insurance for 10 years and Rs10 lakh insurance for 20 years. The idea is that they must have paid down their home loan enough in 10 years that they don’t need the original Rs30 lakh amount anymore.

So the point is that you might buy Rs10lakh insurance for 10 years and Rs 10 lakh insurance for 20 years. You can discontinue insurance at any time, so one strategy is to insure for the entire amount necessarily and, if you end up debt-free, then just discontinue the insurance. Life insurance needs are very inexact so sometimes you just have to pick a reasonable amount and go with it.

Family Financial Situation three: Want insurance which will provide future income for your spouse/kids.

Now this situation may be a little bit getting complicated since, you’re now dealing with a lot of future financial assumptions. Regardless, for this situation an incorrect amount of insurance is a dismay of a lot better than no insurance at all, so let’s continue.

In this case, you would start with all current debts and assume you need enough insurance to cover that amount. That’s the first part of your insurance needs. The second part will provide an investment portfolio large enough to provide the desired annual income. To do this calculation, you can use the 4% withdrawal rule to be conservative.

Example: Raj and Sakshi are in their 30s, have two kids under five, a home loan of Rs30 lakh, and other debts equaling Rs4 lakh. Sakshi is a stay-at-home mom who might return to work one day. They’ve decided that if Raj dies they want to have enough money so that Sakshi doesn’t have to work again if she doesn’t want to, but she won’t be filthy rich. They are assuming that Rs10lakh of income per year will accomplish this goal. They have no savings of any type. So, they add up the debts worth Rs34 lakh insurance needed and get calculate the portfolio size necessary to provide Rs10 lakh per year. 10,00,000/0.04 = Rs 2.50 crore Total insurance needed is worth Rs  2.84 crore.

You can see from this example that future income is expensive! Using the 4% rule is fairly conservative. You might want to consider using a 5% or even 6% rule if the income needs are for a shorter term i.e., if the insurance is only to cover a 10-year income gap before retirement age.

In the end, though, remember that the real thing you’re buying with life insurance is peace of mind. Going through these calculations as per family financial situations and then actually purchasing a policy serves the purpose of letting you sleep better at night. Also Read :Methods for Estimating Life Insurance Needs!

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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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