he most ironical aspect about life insurance is that it is not about life. It is about death. Yours, that is.

Sounds morbid?

It's true. Life insurance is all about your death and its consequences on individuals close to you. Do keep that in mind when deciding how much to insure yourself for.

The purpose of life insurance is to replace your income should you die. It ensures that your family will be able to continue living comfortably. It addresses questions like:

• How will your family pay the rent when you are gone?
• Where will the money for your children's school fees come from?
• Who will fund the expenses on food and clothing?

Your life insurance cover should take care of these issues.

To determine how much life insurance you need, you must determine how much money your family will need over a course of time if you are not there to provide for them.

How do you do this?

1. Do it straight

Estimate what you will make till you retire and insure yourself for that amount.

Sure, it is difficult to know how much you will make 10 years down the line. Simply take your current salary and multiply it by the number of years you have left before retirement.

For example, if you are 25 and are making Rs 300,000 a year, you would make Rs 10.5 million over the next 35 years (assuming you retire at 60).

That is the sum that you should insure yourself for.

Watch out for:

~ This approach might mean you would buy way too much or too little insurance, depending on how much you make.

~ This approach does not take inflation into account.

~ This approach also does not take into account the fact that you will earn more with time and may upgrade your lifestyle.  

Bottom line: Use this approach only as an indicator.

2. Do it meticulously

Examine all the expenses that your family will incur should you die, and account for them.

Track your family's expenditure over a month. That will give you a fair idea of how much your family needs every month to survive:

i. Begin with the periodic monthly expenses: Rent (or monthly outgoings to the society), utility bills, children's school and college fees, food bills and household expenses.

ii. Multiply these by twelve to get the annual figure.

iii. Look at annual expenses, like festivals and vacations.

iv. To the above annual figures, add sporadic expenses, like clothing.

v. Finish off with long-term goals, such as a retirement plan for your spouse and child's marriage. 

Watch out for:

If your expenses (for example, you shop regularly for very expensive clothing and eat out constantly) contribute a good amount to the above, subtract that amount from the above calculations.

We are looking at a situation without you, right?

3. Don't forget inflation

If the figure above scares you, assume a reasonable inflation.

Err on the higher side, say at around 8% every year.

There. You have the amount you need to get insured for.

Calculate till the time your child/ren begin to start earning.

How insurance companies calculate

Insurance companies use the concept of Human Life Value.

In mathematical terms, it is the net present value of your potential future earnings for the rest of your working life.

To put it more simply, it is just a factor of your annual income.

At 25, the insurance should be eight to 10 times your annual income.

At 35, it decreases to six to eight times your annual income.

At 45, it stands at four to five times your annual income.

Don't go by the insurance company's estimate.

Make sure you do your calculation using the method we have suggested. Let the insurance company arrive at their own result.

This will give you a fair indication of what range to opt for.

However cold and calculating this may appear, do keep one aspect in mind: Life insurance is not about taking care of the emotional consequences of death.

It is only about cushioning the financial impact.

Surely, you realise that requires clear thinking and mathematical input!

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