Getting the right life insurance with the right amount of cover is not an easy task. It requires a lot of things to be considered in order to arrive at the right decision which is very important because getting a life insurance which is not suitable for you or with not enough cover might not be able to fulfill all your needs or your family may have to suffer if you die. Making a right decision starts with choosing the right form of life insurance for you and then it goes into deciding what amount of risk cover you will need from your life insurance. Today, we are going to discuss how to calculate the amount of cover that you will require from your life insurance. basically, what we are going to talk about is Life insurance calculators. Along the way, we will also talk about different types of life insurance and coverage provided under them in order to help you choose the right one. SO, let us get right into it.
What is life insurance calculator?
Life insurance calculator is a simple tool that you can find on many insurance company’s websites and use it to calculate the risk cover that you will need from your life insurance in order to live with least financial risk in your life. it serves as a great tool for the people who do not have enough knowledge about the life insurance and want to buy it online as along with the amount of risk cover you will need; life insurance calculator also suggests life insurance plans to the users that suits them. But before all this, one should really decide for which kind of life insurance fits his needs and for this reason, we would suggest you go through our next section and if you have already made up your mind on the life insurance type, then you can skip the next section.
Coverage provided under different types of life insurance
Before you can calculate your life insurance needs, you should first make up your mind on which type of coverage do you need and based upon that you should decide about which life insurance will be better for you and for your good, you don’t need to look anywhere else for that purpose. Below you will learn about different types of life insurances and the coverage they provide.
- Term insurance plan
A term insurance policy is the most basic form of life insurance that comes without any saving benefits. You purchase a policy for a limited period and pay the premiums accordingly. If anything unforeseen happens with the policyholder, then the claim benefits are provided to the beneficiaries and if not, there is no claim provided. Even when the policy period ends, there is no claim provided. This is the simplest life insurance plan you can buy because the only benefit that you have to think about is the cover amount you want.
- Endowment plan
All the other forms of life insurance except the term insurance plan comes with certain kind of saving benefits. Now, Endowment plans are simplest insurance plan that comes with saving benefits. If the policyholder outlives the policy period, then the benefits are provided to the insured himself on maturity and if a claim is made for a mishap with the insured, then nominees get the benefits. Along with this, some periodic benefits can also be earned with this plan either after maturity or before it.
- Permanent life insurance
Whole/permanent life insurance policies are the opposite of term insurance plans. the cover period under it is whole life or certain companies sets the cap at 100years. is the insured outlives the 100years cap, then the maturity benefits are given by the insurance company or otherwise, it is paid to the family of the insured.
- Retirement plan
The prime benefit under a retirement plan is that it serves as a constant source of income after retirement. It allows you to be financially independent even after your retirement. The death benefit under this insurance plan is always higher than the sum-assured and the extra amount is the dependent upon the criterion chosen by the company.
- Child’s plan
Child plans provide the policyholders to build up funds for their children’s future like for their higher education and marriage. Now, in case of death of the policyholder, the benefits are paid to the family.
- Money Back policy
Money back policies are designed for the people who want to take care of their short-term goals. This is done in the way that some part of the sum assured is paid back to the insured periodically which is termed as survival benefits. The usual death claim benefits are still present too.
How much risk cover you should go for?
You must have noticed till now that the better way to choose the life insurance that suits you would be to list out all your short-term and long-term goals and then weigh them out to decide which of them are more important as of now. there are certain common rules that anyone can follow to get an idea of how much risk one should get under a life insurance. we will talk about certain methods which you can use yourself as a personal life insurance calculator. one of the common and simplest methods is to get a cover for about 7-10 times of your present annual income. But neither the risk cover is that easy to calculate nor everyone is geek enough to calculate it themselves and due to this reason, you can find a lot of life insurance calculators online which takes some of your personal information as input and based on that provides you plan that will suit you for your future.
Calculate your own life insurance needs
For the nerds amongst our readers, this section will definitely be of your interest as we are going to list out four methods using which you can calculate your life insurance needs. These methods will help you quickly get an estimate of the risk cover you would need anywhere anytime, even without connectivity and if not anything, what is the harm in knowing how does the life insurance calculator works. So, let us start with the first method below:
- Income Replacement Method
Most of you would find this method to be the simpler one. The way it works is that you start by counting the number of years left in your retirement. Next step is to multiply your annual income by the number of years left in your retirement and this is all, the number you will get will be the life cover that you would need.
To illustrate this method, let us assume that you are 45 years old and your annual income is around 10 lakhs and you plan to retire at the age of 60. Now, the life cover you would need would be 10*(60-45) = 1.5 crores.
- Human Life value
Under the human life value method, the output is the number that you would need to earn in your remaining life to be able to meet all your needs. One of the unique characteristics of this method is that it takes your income after taking out your personal expenses. One thing that you will find with this method is that it is not as simple as the income replacement method. There are a lot of things that are considered under this method like income tax, life insurance cost, current and retirement age, savings done for the family etc. let us look at one of the illustrations below.
Let us assume that you are 30 years old and plans to retire at 60. Your annual income is 10lakh rupees and you have a life insurance for similar cover. All of your outstanding debts amounts to 8 lakhs considering education loan, motor loans, and other loans. Then considering all these numbers, human life value method would give an output of around 1.57 crore as the amount you need to earn for your remaining life to cover all your expenses. Now, you can see that answer we got in the income replacement method was also 1.5 crore but there we assumed the age to 45years and here it is 30 years plus we took a lot of other things into consideration too.
So, the accuracy of any method will depend upon the factors that are considered in it.
- Income multiple rules
This method is similar to the income replacement method but instead of giving a single number as output, it provides a range with an upper limit and a lower limit, anything between which will be a sufficient cover that you will need from your life insurance. it considers your age and annual income and multiplies with two numbers called as upper and lower factor. Below are the factors for different age groups.
|Age||Lower factor||Upper Factor|
The amount of life cover is calculated by multiplying the upper and lower factors with your annual income.
- Need-based analysis
According to many experts, this is the most accurate life insurance calculator as it considers the needs that family would be having if the prime earning member of the family dies. Both the short-term or immediate needs and long-term requirements are considered under this method. Arriving at the life cover one might need from his insurance is also not that difficult under this method and anyone can use this method.
The needs are divided into three categories based on whether they are immediate or not and all three of them are listed below:
o Immediate needs that require a lump sum amount to be taken care of. These are funeral expenses of the insured, medical costs and the loans that the insured had taken.
o Daily life expenses like food, bills, commute etc.
o Long-term needs that require lump-sum amount like education and marriage of children.
Now, the life cover that your family would need today if you die would be the sum of all expenses required to fulfill all these three needs. It can be seen why it is considered as one of the most accurate life insurance calculators, the reason behind buying a life insurance is to take care of all the needs of your dependents even in your absence and this method considers basically all those needs.
- Premium as Percentage of Income
This method is pretty straightforward and simple. the difference between this life insurance calculator and other is that, instead of giving out an exact number as the life cover one might need from life insurance, this method calculates the amount that one should spend on the life insurance premiums based on the annual income of the individual to be insured. According to this method, 6% of the income for the prime earner and an additional 1% of income for every dependent in the family is the amount that one should spend on insurance premiums.
Let us understand with one example, assuming that you are 30 years old running a family of 6 including you, your wife, 2 children, and parents. Your annual income is 10 lakhs. Now, your annual premium would be 11% of your income i.e. 1.1 lakh rupees which includes 6% for you and 1% for five dependents.
So, we talked about everything starting from the definition of life insurance calculator and all the way to different methods that can be used to calculate the cover you will need from your life insurance. although there are life insurance calculators available online that provide you the cover amount but the methods we talked about are beneficial in the way that you get a better insight into your financial status and insurance. it helps you to be a far thinker for your life and helps you in making a better plan for your life in long-term. We hope that you learned something useful out of this information.