How much life insurance should I have?

These days a lot of thumb rules for the amount of insurance an individual needs get bandied around. "The insurance cover of an individual should be at least 5-7 times his annual income" is a rule that gets bandied around the most. While this rule ensures that an individual has some cover, it may not ensure that the individual has the right amount of cover. The "human life approach" is the right way of calculating the exact amount of life insurance that is needed.

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Let us take the case of a 30-year old individual who is married and lives with his parents. His wife is a homemaker and his parents are totally dependant on him.

He earns Rs 60,000 per month, after tax or Rs 720,000 per annum. His own monthly expenses are around Rs 10,000 per month. The remaining Rs 50,000 is what is available to his family. Let us say that if the individual expires suddenly his family will require Rs 50,000 per month to continue living at the same standard that they were used to.

To earn Rs 50,000 per month a capital of Rs 75 lakh (Rs 7.5 million) would be required assuming a rate of return of 8 per cent per annum. At 8 per cent per annum, Rs 600,000 can be earned per year from an investment of Rs 75 lakh. Rupees six lakhs in a year, means Rs 50,000 per month, the amount the family will need. The individual should essentially be taking a term insurance policy of Rs 75 lakh. Term insurance policies are pure insurance policies. If the individual dies during the term of the policy his nominee will receive Rs 75 lakh.

If he survives the period of the policy, he does not get anything. The yearly premium on a cover of Rs 75 lakh, for a period of 25 years, on Anmol Jeevan-I, the term insurance policy from Life Insurance Corporation of India comes to Rs 28,660 per annum.

The fact that there is more than one methodology to calculate the HLV makes the subject even more challenging to understand.

The most common definition of HLV is the expected life time earnings of an individual, i.e. what is the total income that the individual is expected to earn over the remainder of his working life, expressed in present Rupee terms.

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