What are the Ways to Calculate your Life Insurance Cover?


Buying a life insurance policy is an effective way to shield your family from financial setbacks in your absence. The lump-sum corpus that your loved ones will receive can help them tide over the financial gaps when you are no longer around. To ensure this, you must choose an appropriate life cover amount. This amount should not only help your family meet the expenses of their daily life but also allow them to pursue their goals worry-free. Let’s learn more about how that can be achieved.

Understanding how life insurance works 

Firstly, we must understand the workings of life insurance. It is bought with the sole aim of providing financial protection to an individual’s loved ones in the event of their demise. In return for this protection, the policyholder is expected to pay premiums, either via instalments or in a lump-sum manner. The premium might differ in several aspects. For instance, the premium for a term life insurance policy is lower than that of a whole life policy. One must note that financial compensation is provided only if the demise occurs in a manner covered by the policy.

One question that a lot of policyholders often face when buying their life insurance policy is, how to arrive at the right life cover amount?

Gratefully, there are various ways to calculate the life cover that meets your needs specifically. Let’s check them out.

  1. Calculating the human life value method

The human life value or HLV refers to the economic value of a particular individual. It considers the several expenses and financial liabilities that the person is responsible for to calculate their life insurance needs. As per this method, the life cover of a person should be in tandem with the HLV of the person.

To calculate the HLV of a person, one should consider factors, such as:

  • Gross annual income
  • Monthly/ annual expenses
  • Taxes payable
  • Current insurance cover
  • Liabilities (outstanding loans and other debt)
  • Current age and retirement age, and so on.

Based on the value generated, you can get a close estimate of the life cover you should select. You can access your HLV with the help of several human life value calculators available online. Having said that, one must note that, similar to the life insurance calculator, the figure generated here is simply an estimate.

  1. Needs analysis method 

This type of method takes a look at the varying needs of your financial dependents and other factors to arrive at a figure which may be an appropriate life cover amount. Here is what you should consider when analysing your needs:

  • The number of financial dependents and their present and future needs (for instance, children’s education, their marriage, etc.)
  • Outstanding loans
  • Extended financial support for your spouse
  • The costs of the lifestyle that you wish to provide for your family
  • Other specific needs, such as medical treatment for chronic diseases, and so on.

After you have arrived at a figure, you need to deduct two variables from the same – the coverage amounts of your current life insurance policy and the total value of your assets (excluding your house and car). The answer you receive is the amount you need to consider adding to your policy.

The needs analysis method should be utilised at several stages in life to review one’s life insurance coverage consistently.

  1. The income replacement method 

According to this method, one should calculate their life cover amount by multiplying their present annual income with the number of years remaining until their retirement. The figure you arrive at can be a suitable life cover amount for your financial dependents.

  1. Calculating via the underwriter’s thumb rule 

The life coverage requirement changes as one ages. The underwriter’s method of calculating the life cover takes this factor into consideration. As per this method, the annual income should be multiplied a certain number of times to arrive at a sum assured amount for someone in a particular age group. So, for instance, individuals in the age range of 20-30 years should ideally have a life cover that is 25 times their current annual income.

One should also check if the life cover, they are planning to opt for is within their budget. A life insurance calculator can benefit you greatly here. All you have to do is enter the tenure, the sum assured amount, your gender, age, and so on, to get a premium estimate.

Do consult a financial expert for more details.