Life insurance is designed maily to protect the beneficiaries’ standard of living in the event of the untimely death of a wage/income earner. Through life insurance, the beneficiaries will have the financial resources to protect their future income and pay for immediate and future financial obligations. We need life insurance if our financial obligations at the time of death exceed our financial assets. Life insurance is required in all of the following cases, where the individual
* is married and has a dependent spouse
* has dependent children
* has aging parents and/or dependent siblings
* has low retirement savings and pension which won’t be enough for the surviving spouse in future
* owns a business which is partnership
* has substantial debt/financial obligation for which another person would be legally responsible after death.
Families should consider their total financial needs and other resources available when determining their need for life insurance. While buying life insurance, a family should select policies according to its particular financial needs. Also insurance program should be reviewed and revised periodically to meet the changing needs.There are many parameters to determine the insurnce need. A financial planner can help the individual in this aspect. A simple rule known as income rule provides a guideline to assess the insurance need of an earning individual. It uses a basic multiple of income, which has a
direct bearing to the age of the individual seeking the insurance cover. The income to be taken is the net income only (i.e after deduction of personal consumption expenses of the income earner)
The basic chart is depicted below
Age Profile Min Multiple Max Multiple
Below 35 yrs 12 15
35-50 yrs 10 12
50 yrs and above 8 10
Thus if you are below 35, you need to multiply your annual income with 15 to determine the insurance requirement. Under this rule, if your net annual income is Rs. 1,00,000 and you are 30 year old, you must have life insurance cover of around 15 lacs. Calcuating the Human Life Value is also a method of determining the need of insurance.
Thus Life insurance = Cash needs + Present value of Net income needs – Expected availabele assets.
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