There are several approaches to estimating the life insurance cover you need. One simple approach is to use a multiple of current income. The principle here is to take life insurance that is sufficient to pay off all outstanding debts and also contribute 7 years of the wage earner’s current income to the family.
Let’s take a few examples to illustrate this.
Consider a family with annual income of Rs 5 lakhs, which has a home loan of 25 lakhs and other debts of 5 lakhs. The minimum cover required works out to 65 lakhs i.e. Rs 30 lakhs to take care of the debts and Rs 35 lakhs to cover 10 years of income.
If we consider a more affluent household with annual income of Rs 10 lakhs, which has a home loan of 50 lakhs and other debts of 10 lakhs, the minimum cover required works out to 1.3 crore i.e. Rs 60 lakhs to take care of the debt and Rs 70 lakh to cover for 10 years of annual income.
There are some other approaches to estimating the life insurance cover. These include the ‘multiple of expenses’ approach, the bottom-up estimate of future expenses. All these approaches work on the same fundamental principle which is that after the death of the wage earner the family should have the finances to live life without compromising on the quality of life, education of children, or responsibilities such as marriages and family holidays.