Everyone talks about the need for life insurance, but very few think of getting the right amount of insurance. This is extremely crucial because the whole purpose of buying a life insurance cover is to make sure that your family's needs are taken care of even if you are not around to bring home the paycheque every month.
One concept that helps you to determine the amount of insurance or sum assured is called the human life value (HLV). We may think our life is precious, but the fact is that every life has a particular monetary value especially if the concerned individual is a breadwinner of the family. This is in terms of the financial contributions you make to the family and the financial commitments your immediate family has to shoulder in case of unexpected death. Simply put, it is the present value of your earnings and its likely future value.
Determinants of HLV
There are three determinants of HLV:
The dependants' age: Assume you have a dependant spouse who is 30 years old. If the assumption is that she will live up to 80 years, then you have to financially provide for her for another 50 years.
Current, future expenses: These include recurring expenses as well as big-ticket expenses such as child's education and other expenses till the child becomes financially independent.
Your liabilities: These include home loan, car loans and other liabilities, which your family has to service in your absence.
This includes building an emergency medical kitty or some corpus which can be used for any other unexpected emergencies. Your income and its future value after accounting for inflation. Put a figure to each of these elements, which will help you arrive at a ballpark figure. This ballpark figure is the amount of life insurance you require. This figure should be the sum assured of any insurance policy. Preferably, buy a term policy equivalent to your life value as it is the most effective and cheapest form of insurance available in the market. It is the best protection cover for your family, which can be topped up with other forms of insurance such as Ulips, endowment or moneyback plans.