How Much Insurance Do You Need?

Insurance Need Calculator (Human Life Value)

Have you ever gave a thought to how much insurance do you need to protect your family financially in your absence? Most people do not know how much insurance they need to cover family financial needs in case of their absence due to death.  They are grossly under insured mostly due to not knowing their exact need for insurance.  Insurance is one of the primary need to give financial support to family in case of unfortunate death of a earning member.

 People usually takes insurance through endowment and other traditional families.  They provide very less life cover for huge premiums.  The best way to take insurance for one’s life is through term insurance.  Before starting any other investment one needs to have sufficient life insurance followed by health insurance.  The decision of how much insurance one need to take is not to be based on premium paying capacity.


Before calculating how much insurance do you need, let us see various calculation methods available for understanding the insurance needs of a earning member in the family. In this article, let us see three most popular life insurance need calculation methods.

  1. Human Life Value or HLV Calculation Method
  2. Income Replacement Method
  3. Need based Insurance Requirement Method

Human Life Value or HLV Insurance Calculator

Human Life Value?  Can we assign value to any human life?  Although, Human life value calculation looks absurd, its valuable in knowing the insurance requirement.  HLV method is one of the popular insurance need calculation methods.  Human Life Value Calculator takes in to account, present earnings and future earning capacity of an earning person.  It takes in to account annual earnings minus present personal expenses and personal taxes, premium for future life insurance premiums. Also Human life value method for insurance need takes in account future rate of return and optionally inflation adjusted rate of return too.  In this way one can have more accurate idea of how much insurance they need in the event of early demise.  This

Income Replacement Method for Calculating Insurance Requirement

Income replacement method for knowing insurance is simple one to calculate but is not most suitable.  It takes into account No of years left for retirement and present Income. Also See thumb rules in financial planning .  Another variation which is more simpler is to multiply current annual income with a multiplier of 10.

The minimum life cover should be 10 to 15 times of present annual income. Present annual income should be calculated after taking our present personal expenses and personal taxes on that income.  This does not take in to account family’s requirements and unique needs. For this reason it is not suitable for exact analysis.  But its useful to quickly know the insurance requirement.  If proposed insurance amount is more than 20-25 times of annual income, under writers look at the proposal suspicious.

How to calculate:

Annual Income: 10,00,000

Requirement of Insurance is in the range of 1 Cr to 1.5 Cr.

Another Variation:

Time for Retirement (Remaining Working life in Years): 25

The required insurance under this method is 2.5 Cr

As can be seen this method does not take in to account actual family needs. Also notice that the amount will be huge for young people and very low for people nearing retirement.

Need Based Insurance Calculation

In contrast to the Human life value calculation method, need based insurance takes into account actual needs or expenses of the family in to account.  These can be divided in to two

  1. Immediate needs like funeral expenses, loan pay offs etc,
  2. Future needs like family retirement expenses, children education etc.,

Most financial planners prefer need based approach due to its utility in real life.  In this approach first the needs of the family are taken in to account.  These needs can be either long term or short term.  If spouse is also a working and earning member, then the actual need based insurance can be lower as other one can continue contribute to family expenses. Need based insurance calculator will be updated in future.

Taking life insurance is a vital decision in anybody’s life.  Although untimely death of a family member can not be fulfilled by insurance, lack of it will mostly ruin the family financially.  Before considering any investments one must have adequate insurance.  First life insurance followed by health insurance.  The best way to have sufficient life cover at reasonable premium is to opt for term Insurance Plans.  Most people show aversion to term plans due to absence of any returns if they are alive.  But, premiums are too low for sums of insurance of even 1 Crore.  One can not have sufficient life cover with traditional and endowment policies with such low premiums.

If you do not already have sufficient life cover, do not waste time.  The right time to take a term policy is NOW as no one knows what happens tomorrow.  Insurance, at least, gives financial protection to family members in case of un expected death of earning member.




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