How do I know if I have the right level of life insurance cover?
One easy way to determine whether you have adequate cover is to total up your annual expenses. Multiply this figure by 14 — this is a simple way to come up with the level of insurance that will ensure that the family meets its annual expenses in the absence of the main earning member. Let us assume that the family incurs ₹12 lakhs of expenses annually. If this figure is multiplied
by 14, we get a figure of about ₹1.7 crore. Incidentally, the figure 14 is an easy rule-of-thumb to determine an insurance amount that will help cover the family’s annual expenses just through the interest payments alone, without eating into the insurance corpus. ₹1.7 crore is then the minimum level of insurance cover required because if this amount is invested in a fixed deposit that generates a post-tax interest of 7%, then the interest income of ₹11.9 lakhs will take care of the family’s annual expenses. This is the bare minimum level of life cover the breadwinner of the family must have. This amount is called the ‘family welfare fund’. If both partners are working, apply the same rule of 14 to the part of annual expenses that each partner contributes.
Nandini Amogh