Know the Purpose of Life Insurance

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  1. Know the Purpose of Life Insurance

Life insurance is essentially meant to:

Replace income lost by your dependents.

Pay off outstanding debts (e.g., mortgages, personal loans).

Fund your children's education.

Pay for final expenses such as funeral costs.

Leave a legacy or charitable gift.
  1. Common Ways to Determine Life Insurance Needs
    A. Income Replacement Method

This technique determines the amount of money your family would require if you suddenly lost all income.

Calculation:
Gross income yearly × Number of years your family will require financial assistance

Application:
Assume you make ₹10 lakhs a year and your family would require financial help for 20 years:
₹10,00,000 × 20 = ₹2 crore
B. DIME Formula

DIME is short for:

Debt

Income

Mortgage

Education

Include the following:

Debt: All loans, credit card balance, etc.

Income: Your income times the number of years your family will require assistance.

Mortgage: Current home loan.

Education: Future cost of children's education.

Example Calculation:

Debt: ₹10 lakhs

Income: ₹10 lakhs/year × 20 years = ₹2 crore

Mortgage: ₹50 lakhs

Education: ₹30 lakhs

Total Life Insurance Need = ₹10L + ₹2Cr + ₹50L + ₹30L = ₹2.9 crore
C. Rule of Thumb (Basic Estimation)

10 to 15 times your annual income.

Add any other liabilities or objectives.

If your salary is ₹10 lakhs:
₹10L × 15 = ₹1.5 crore (rough estimate)

  1. Factors to Keep in Mind When Choosing Coverage
    ✅ Dependents

Spouse, children, aging parents, or anyone who is financially reliant on you.

✅ Outstanding Loans

Home loans, car loans, personal loans, credit cards, business debts.

✅ Household Expenses

Monthly grocery, bills, transport, healthcare, etc.

✅ Children’s Future Needs

Education (school/college), marriage, etc.

✅ Inflation

Always provide for future rise in cost of living.

✅ Existing Assets and Insurance

Savings, investments, other life insurance policies, EPF, PPF, mutual funds.

  1. Options of Life Insurance to Select
    ✅ Term Insurance Economical, high-cover policy. Pays only if the policyholder passes away within the policy duration.

✅ Whole Life Insurance

Cover for your whole life.

Can be costly, may have savings/investment aspect.

✅ Endowment / ULIPs

Life cover + investment.

Costlier; a portion of the premium is invested.

Tip: If protection is your only aim, opt for Term Insurance and invest independently.

  1. Shifting Your Coverage Over Time

Your life insurance requirements change according to:

Marriage

Having children

Purchase of a house

Professional changes

Loans repaid

Check your policy every 2–3 years or upon significant life changes.

  1. Mistakes to Steer Clear Of Underestimating future costs or inflation. Failing to consider spouse’s financial security. Counting solely on employer insurance, which is not necessarily enough or portable. Not reviewing your policy periodically.

Taking too little cover to cut premium costs.

  1. Online Tools and Insurance Calculators

Several insurers give calculators for life insurance on their websites where you can enter:

Age

Income

Dependents

Liabilities

Future goals

And receive a recommended coverage amount.

  1. Sample Life Insurance Need Calculator
    Item\tAmount (INR)
    Income replacement (₹10L × 20 years)\t₹2,00,00,000
    Outstanding Home Loan\t₹50,00,000
    Education Expense for Children₹30,00,000
    Other Loans₹10,00,000
    Last Costs (Funeral, etc.)₹5,00,000
    Total Life Cover Required₹2.95 crore
    ✅ Conclusion: How Much Life Insurance Do You Need?

You need to buy life insurance that covers:

All your loans.

Your family for a few years in your absence.

Significant life objectives such as your children's education.

Inflation and future costs.

Average around 10–20 times your yearly salary + any debt and long-term financial objectives.

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