By A P Singh and Pallavi Seth
Life insurance can play a major role in ensuring financial immunity. While many people buy life insurance to save tax, that is not the right approach for financial protection. Under-insurance will not help to fulfil the financial needs of the family in the absence of the breadwinner.

You can use any of the following methods to find out the required amount of life insurance coverage.

Human Life Value (HLV)
This method helps to calculate the economic value of an individual. It is calculated on the basis of age, current and future earnings and current and future expenses. Based on this, the sum assured can be matched to the financial requirements of the family. Most life insurance companies have human life value calculator on their websites.

Income replacement method
This calculates the life insurance coverage on the basis of your annual income. Required insurance coverage is equal to annual income multiplied by the number of years left for retirement. For example, if the annual income is Rs 10 lakh, current age is 35 years and retirement age is 65 years, then required life insurance coverage would be Rs 3 crore.

Need analysis method
Here, calculation is done on the basis of day-to-day needs of the family. The major factors considered are number of dependents, loans, children education, children’s marriage, any special needs of the children or family, provision for non-working spouse, etc. The sum of all these is what the family needs today. The assets and already existing life insurance policies are subtracted and then the final amount to buy the right life insurance plan is decided. Simply put, life insurance to meet family needs = (immediate needs at death + present value of ongoing family needs) – available assets.

Underwriter’s thumb rule
This is one of the simplest methods. The required sum insured should be at least 20 times of the annual income. For example, if one earns Rs 10 lakh per annum; the insurance needed would be Rs 2 crore.

Inadequate cover
Many people don’t have sufficient insurance coverage as they are mainly dependent on their employer provided group term insurance plan. However, these are only valid till the time of employment. Again, the personal life plan one has may not be enough for the family’s financial obligations in the future. So, the life insurance plans should be upgraded and additional policies can be bought accordingly.

As the needs of the families change as one transitions from one stage of life to another, one must make changes in the life insurance policies as well accordingly to ensure financial immunity of the family.