The most pertinent question a prospective insurance buyer has to face is: how much insurance is sufficient insurance? The answer to this question depends on many factors, such as age, profession, income, expenditure, liabilities, lifestyle, and so on. Clearly, the financial needs and capabilities of a person earning Rs 10 lakh per annum and another person earning Rs 1 crore per annum would be very different, and therefore, the insurance needs of these two persons would be different too.
The amount of insurance coverage needed for an individual is determined by Human Life Value (HLV) which represents the current value of an individual’s earnings and the projection of its future value. The HLV is determined on the basis of the following three key factors:
Dependents’ age: The age of the dependents of the insured needs to be taken into account at the time of buying insurance cover. The lower the age of the dependents, the longer will be the duration of financial support needed.
Expenses: The current and future expenses of the family of the insured have to be taken into account to ensure that the financial needs of the dependents are taken care of in the event of the demise of the insured. The current expenses of a person earning Rs 1 crore per annum would be much higher than a person earning Rs 10 lakh per annum, and accordingly, the insurance amount in the case of the former will have to be much higher so that the dependents of the insured can maintain their lifestyle after the death of the insured. Also, the future expenses such as children’s education and marriage have to be factored in.
Liabilities: The current liabilities of the insured such as home loan, car loan, education loan, personal loan, etc. have to be taken into account while deciding the amount of insurance cover needed. The higher the liabilities, the greater will be the cover needed.