Cost of Life Insurance
- How much does life insurance cost?
- How much do I insure myself for?
In order to buy a life insurance policy, you must pay premiums to the life insurance company. The amount of premiums payable depends upon the type of policy, term of policy contract, sum assured and your age.
You could pay these premiums monthly/half-yearly/annually or as single premiums.
One of the simplest rules is to assume that insurance is a replacement for your lost earning capacity. Calculate your total income for the years that you expect to work.
Assuming that the prevailing interest rate is 8%, you need to insure your life for at least 12 times your current annual income. Assuming that a family needs Rs 100 annually for household expenditure and the rate of interest would be at 8%, then the breadwinner needs to have a life insurance policy of approximately Rs 1200. If the insurance amount were to be put in the bank by the family, the family would get a comfortable Rs 96 p.a., which would at least enable the family maintain the current life style.
However to calculate your insurance need more precisely, use the following steps:
- Calculate monthly livable income required (post-tax). This is the monthly amount that the survivors of the policyholder will need in the event of his death. This is taken at 70% of the current total family expenses. Denote this as "M".
- Calculate monthly income required (pre-tax) as M/(100-t)%. Denote this as "M1". Here t = tax rate.
- Calculate annual income (A) = M1*12.
- Assume estimated-earning rate on capital as 8%. Denote this as "r".
- Calculate capital livable income required (C) as A / r%.
- Subtract existing insurance cover amount (if any) from "C".
- The final amount you arrive at is the amount for which you should buy insurance.