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How much life Insurance do you need?

Aug 30, 2019

There are many factors to consider when calculating life insurance. For e.g. Marital status, Dependents, Earning of each spouse, How much time you have left to work and debts. These factors change so it would be wise to consult a trusted financial planner before making any decisions. But the main thing to keep in mind is the amount of life insurance must be enough to replace the earnings power of the deceased for those that depend on them.

Buying life insurance doesn’t make sense for everyone. if have no dependents yet enough assets to cover your debts and the cost of estate lawyers etc.. , then insurance is an unnecessary cost for you. If you do have dependents but you have enough assets to provide for them after your death for e.g. investments, trust etc…. then you do not need life insurance. However, if you have dependents especially if you are the primary provider or significant debts that overweigh your assets than you likely need insurance so that you dependents are looked after if something happens to you.

Let’s imagine a simplified example of replacement income:

Veena earns 35Lakhs per year and is the sole earner for her husband Amit and child and they have no debts. If Veena passed away, the household income would go to Zero. Amit would need to find a job and take care of his child. So to replace most of her income and leave her family provided for Veena would need about 5.25Cr in life insurance. That money could be invest at around 6% and drawn down monthly over 30years so Amit could have about 31Lakhs per year income.

Every situation will be different for example:

Amit could find a job in a couple of years or their child might need more money for college. These unique situations require the advice of a registered financial planner . They can make sure you are accounted for they can calculate an estimate of what coverage you need and can speculate on potential interest rates, taxes and inflation.