Khota Paisa

How Much Insurance Do You Need?

Posted in Insurance by khotapaisa on June 8, 2009

When I was looking to take insurance, I talked to a no. of financial advisors. I also read articles, blogs etc on the net. But I couldn’t arrive at a satisfactory insurance figure. Infact, the insurance needs are very specific to the individual. Ideally, if you need enough insurance to allow your family to live off it for the rest of life. But it is not practically possible to take such a huge cover. There are few thumb rules to calculate insurance needs. But I have my own thumb rule to figure it out.  It goes like this –

Step 1. You need to fix the no. of years you want the insurance amount to last for your family. Typically, 20 years is good enough.

Step 2. You take your current annual expenses (minus your expenses) and multiply it by the no. of years from the previous step.

This amount will be sufficient to cover your family for the no. of years you planned for (refer step 1) no matter what the inflation. As an example, if your annual expense on your family is 4,00,000/- and you want your insurance amount to last for at least 20 years, you should take an insurance of 80,00,000/-.

Assumption – It is assumed that the insurance amount is invested to give enough returns to match the inflation.

Note – Treat this is as another thumb rule.

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