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There are no hard and fast rules, nor any easy formulae to help you decide how much life insurance cover you need. However, there is a fairly straight forward approach which each of us can follow.
Since life insurance is, first and foremost, financial security
for your family, you can judge how much money your family will need incase of
your premature death and build your insurance portfolio accordingly.
For instance, if you are contributing Rs.3,000 a month for meeting your family’s needs, you must have a life insurance cover of around Rs.3 lakhs. In case of the policy holder’s death the family can invest this amount in some absolutely safe investment avenue such as government bonds, which pay 12% interest. The annual interest of Rs.36,000. Additionally, the insurance portfolio could also include polices specifically earmarked for the education and marriage of your children.
Income replacement is another approach to determine how much insurance one needs. There are ways to figure it; two are discussed below:
- Seventy-five percent solution:
Some observers believe that a family, particularly a young one, needs about
75 percent of the take-home pay the insured would have received until age
sixty-five.
- Five times solution:
A second income replacement formula is to buy insurance equal to five times
your annual income less any insurance equal to five times your annual income
less any insurance already held. Suppose your annual income is Rs.25,000.
Multiply this by 6 and it equals Rs.1,50,000. Now if you have Rs.25,000 in-group
life insurance, you need an additional Rs.1,25,000 (Rs.1,50,000 minus Rs.25,000)
of insurance.
