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YOUR MONEY: Calculate your current life insurance needs now

In a life insurance policy, figuring out the life cover is the most important component. This is the sum that will be given to the designated beneficiary in the event that the policyholder passes away during the policy’s term. To do this, the expected future earnings life of the person must be used to calculate the human life value (HLV).

This makes an effort to determine a cover amount that is equivalent to the present value of the insured’s future earnings, accounting for a number of factors including after-tax income, the anticipated number of years the income will be earned, an annual estimate of income growth, a risk-free discount factor (such as the PPF rate) for future earnings, etc.

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Techniques for computing HLV

Method of need analysis: It makes an effort to determine the recipients’ future requirements before translating that information into a death benefit. This approach is often predicated on the following assumptions: (a) it pays benefits in the short term after the insured’s death to offset extra costs; (b) it sustains the dependents’ regular living expenditures; and (c) it gives the retired surviving spouse long-term income.

The most straightforward approach of all is the multiple salary technique. A multiplier of the employee’s wage determines the maximum insurance coverage. This multiple will vary based on the covered person’s age and income. It is assumed that the family can subsist on a portion of the insured income and that the life insured is the sole source of income.

For instance, Raju, who is forty years old, makes Rs 12 lakh annually. His parents are retired, his 10-year-old daughter, and his spouse are homemakers. Using a variety of pay strategies, he is able to get a paycheck that is ten to fifteen times his yearly wage. Rs 1.2–1.8 crore will be the cover amount.

Income replacement method: This approach makes the assumption that the breadwinner’s lost income should be replaced by life insurance. Here, insurance coverage equals current yearly income times the number of years before retirement. For instance, if you are 40 years old, earn Rs 15 lakh a year, and want to retire at 60, you would need Rs 3 crore in coverage (Rs 15 lakh x 20).

By using these techniques and taking into account different aspects, one may determine a suitable amount insured that would provide their loved ones sufficient financial security in the case of an early death. A financial adviser or insurance specialist should be consulted in order to get personalized advice based on the client’s unique financial circumstances, objectives, and risk tolerance.

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