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Want life insurance? Check this out!

September 16, 2017 12:40 IST

What approach should you take when you decide your life insurance policy?Check out Naval Goel's advice.
Illustration: Dominic Xavier/

The major role that life insurance plays is in offering the death benefit.

The financial loss after the death of the breadwinner of the family is protected with the help of life insurance.

But you should be careful about your insurance needs.

To know how much insurance you require, you can go through these approaches:


1. Human Life Approach

This approach actually forecasts the income need of the individuals by the expectancy of the remaining life.

It generally uses a discounted rate when the present value of the life is being calculated.

The calculation takes place in the following manner:

2. Need Approach

This is another approach which is widely used for determining the needs of life insurance.

The needs of the family should be analysed.

If the breadwinner of the family become disabled or dies suddenly, then this need analysis is very important.

This analysis can be calculated by the following factors:

Now, how will you determine the amount of life insurance you will require?

1. Calculate The Expenses Of The Family In The Event Of Death: You should consider the final expenses including the outstanding debts.

There may be some debts which automatically retire after death. You should be aware of all those debts.

2. Add Unfunded Goals: If any unfunded goals are present, you should consider them fully.

For example, college funding expenses.

You should consider the expected amount of college expense and subtract the amount which you have already saved.

3. Determine The Amount Required To Fill The Gap Of Cash Flow: For planning your insurance, you should determine the cash flow gap.

Without you, your family's income and expenses can only be protected if you can determine the amount carefully.

There may be some changes when you are gone. You can ask some of the questions yourself:

4. Calculate Present Value Of Gap Of Cash Flow: You can use the online calculator for calculating the present value of the cash flow.

As life insurance is required for replacing the income of the deceased, you can also use a conservative approach.

The life expectancy of the beneficiary is to be considered and the proceeds can be invested in the income producing assets.

5. Add The Amount Owed On Mortgage: If your family is not able to pay the amount owed on mortgage, you should possess sufficient amount of life insurance so that the amount gets paid off easily.

6. Subtract The Non-Retirement Investments: If you possess some non-retirement investments, it can supplement the gap of the cash flow.

The post-tax value of the investments can be subtracted. This will help you in determining the amount of your life insurance.

When you are assuming the future expenses, you can assume the savings during the retirement expenses of your spouse.

If the spouse is presently not saving the expenses of the retirement, the need of the life insurance increases naturally.

So whether it's human life or the needs approach, you need to predict the future expenses of the life expectancy of the dependents.

Naval Goel is CEO and Founder,

Naval Goel