How much do I insure myself for?

One of the simplest rules is to assume that insurance is a replacement for your lost earning capacity. Calculate your total income for the years that you expect to work.

Assuming that the prevailing interest rate is 8%, you need to insure your life for at least 12 times your current annual income. Assuming that a family needs Rs.100 annually for household expenditure and the rate of interest would be at 8%, then the breadwinner needs to have a life insurance policy of approximately Rs.1200. If the insurance amount were to be put in the bank by the family, the family would get a comfortable Rs.96 p.a., which would at least let the family maintain the current life style.

However to calculate your insurance need more precisely, use the following steps:

  • Calculate Monthly Livable Income required (Post tax). This is the monthly amount that the survivors of the policyholder will need in the event of his death. This is taken at 70% of the current total family expenses. Denote this as “M”.
  • Calculate Monthly Income required (Pre tax) as M/ (100-t)%. Denote this as “M1″. Here t = Tax rate.
  • Calculate Annual Income (A) = M1*12.
  • Assume Estimated-earning rate on capital as 8%. Denote this as “r”.
  • Calculate Capital livable income required (C ) as A/ r%.
  • Subtract Existing Insurance Cover amount (if any) from “C”.
  • The final amount you arrive at is the amount for which you should buy insurance.