How Much Life Insurance Should You Buy?

by SMCIB on Monday, 20 February 2023

How Much Life Insurance Should You Buy?

Rahul and Kunal want to buy term insurance plans to protect their loved ones financially in their absence. Rahul is 25 years old and unmarried. He has taken a student loan of Rs 20 Lakhs, the burden of which will shift to his retired parents if he passes away. On the other hand, Kunal is 28 years old and has a financially dependent wife and a child. He also has taken a home loan of Rs 25 Lakhs. It can clearly be seen that Kunal will need larger term insurance coverage as compared to Rahul.

So, it can safely be surmised that term insurance or any form of life insurance is a personal product. However, just choosing a plan isn’t enough. You need to choose the right cover amount as well, depending on the plan you buy and its purpose.

For instance, term insurance acts as a financial cushion for your loved ones in your absence. It gives them the cover amount as a death benefit, which should suffice their financial goals/obligations as well as everyday expenses. If you talk about retirement plans, the coverage you choose should depend on what your post-retirement needs are. You will not have a regular salary during these years, which makes it important to buy the right coverage to avoid any financial hardship.

In this article, we’ll take you through various life insurance plan types and how you can calculate the right coverage in each case.

How Much Life Insurance Should You Buy?

Before we have a look at various life insurance plans available in the market and the cover amount you should purchase under each plan, let’s understand one important thing.

If you look at life insurance plan types other than term insurance, the cover amount is generally 10x the annual premium. This amount will suffice your goals but can be significantly less for your family’s needs if you pass away. So, you should consider these life insurance plans as investment avenues for your milestones, while the death benefit should be thought of as an extra bonus with the plan. It’s wise to invest in term insurance simulatneously if you wish to create a financial cushion for your family.

Life Insurance Type How Does It Work? How To Calculate The Coverage You Need
Term Insurance Plan

The insurer pays a fixed amount of money to your family in case you pass away during the policy term.

To evaluate the right cover amount and to meet all your family’s future needs smoothly, you need to identify what you owe and what you own.

To find out the amount you owe, you need to figure out your family’s long-term goals like children’s education, wedding, etc, short-term expenses like monthly bills, groceries, etc., and any liabilities like home loans, personal loans, etc.

Next, calculate the amount you own. This includes cash, savings, fixed deposits, mutual funds investment, etc. However, your investments and assets cannot be liquidated instantly. You will have to multiply them by their appropriate risk factors -

Savings, cash, fixed deposits @ 100%

Existing life insurance covers @100%

Equity investments @ 50%

Gold & residential property @ 0%

Stock options @ 0%

Subtract the amount you owe from the amount you own to understand the financial gap you need to fill.

Also, take into consideration the inflation rate of 6-8%. This will give you the right cover amount.

Whole Life Insurance Plan

Whole life insurance provides you with lifelong coverage. It is a great way to leave behind a financial legacy for your loved ones and ensure a stable future for them.

Jot down your short-term goals like paying for utilities, groceries, bills, etc. and your long-term goals like paying for education/weddings, retirement, etc. Also, any loans that you may have taken.

Then, note down your current financial assets like bank savings, FDs, gold, etc. along with any life covers that you already own.

The cover amount you pick should be enough to secure the financial future of your family and also give them the financial legacy you intended. Factor in an extra 6-8% to inflation-proof the cover.

Child Life Plan

A child plan helps you accrue funds to fulfil your child's milestones like education, wedding, etc. - whether or not you’re around.

First, you need to clearly understand the milestones you want to cover and the costs associated with them. This may be a destination wedding, postgraduate studies in a good college, etc.

Then, list your existing life insurance covers, gold, cash and any debts/loans to get a sense of the amount you can foot yourself.

The gap between what is to be covered and what you can cover is to be filled with the cover amount. You should also factor in an inflation rate of 6-8%.

Endowment Plan

A combination of insurance and savings, endowment plans give you a lump sum on maturity for your future financial goals like retirement, investing in real estate, your child’s wedding, etc.

If you pass away during the policy duration, your nominee receives the lump sum amount as a death benefit.

Understand your financial goals and the money you will need for them. In the most basic sense, the coverage you choose should be adequate to fulfil these goals.

For instance, Sonia aims to buy a house after 10 years, which will cost her Rs. 80 Lakhs. So, she can buy an Endowment plan with a cover amount of Rs. 80 Lakhs for the duration of 10 years.

You can also factor in your current finances to see how much you can fund yourself. Also, don’t forget the inflation rate of 6-8%!

Important: Some endowment plans allow you to choose the premium, not the cover amount. The cover amount will be a multiple of the premium you pay annually. The amount you’ll invest should be determined based on your goals.

Guaranteed Income Plan

A guaranteed income plan gives you regular payouts to help you meet recurring financial needs like rent payments, bills, school fees, etc.

If you pass away during the policy term, your nominee will receive the cover amount as a death benefit.

Make an estimate of the payouts you will require to achieve your future financial needs, like retirement, EMI payments, etc. They will serve as a regular source of income.

Also, take into consideration an inflation rate of 6-8% as you’ll receive these payouts a few years down the road.

Note: Not all guaranteed income plans allow you to choose the cover amount, some allow you to decide the premium amount. The amount you’ll invest should be decided based on your future milestones.

Unit-Linked Insurance Plan

A unit-linked insurance plan gives you the option of investing in the stock market, based on your risk appetite. It also gives you insurance coverage.

It basically pays you a maturity benefit if you survive the policy duration. If you pass away, your nominee will receive a death benefit.

ULIPs, since they invest a portion of your premium in the stock market, can give you really good returns which can fund your financial goals after policy maturity. For instance, you may want to start a business, buy a house or car, etc. So, know the goals you want to fulfil and invest an adequate amount to achieve them.

However, when it comes to the death benefit aspect, your ULIP returns may not be enough to cover the financial needs of your family. So, as discussed above, these plans should be treated purely as investment avenues and it’s recommended that you simultaneously invest in a term insurance plan to ensure the financial safety of your loved ones.

Annuity Plan

A type of retirement plan. It gives you a regular income during your retirement years, i.e., an annuity.

The premiums you pay are accumulated and get converted into annuities.

While this plan has no cover amount component, you can decide the annuity you will need during your retirement years. Make sure it encompasses all your financial needs.

The annuity you will receive depends on the invested amount, the annuity rate decided by the insurance company, and the customisation options you select. The more money you invest under the plan, the larger annuities you will receive after you retire.

Pension Accumulation Plan

A type of retirement plan. You invest your savings to accumulate a retirement fund. Once you retire, you are paid a lump sum amount to fulfil your needs.

Since the primary motive for investing in this plan is to fund your post-retirement goals, estimate the amount that you will need after your retirement. Make sure you add in an inflation rate of 6-8% while deciding the amount.

Important: You cannot use the whole payout amount as you like and certain IRDAI regulations need to be followed. You are given the following choices -

  • You can invest the entirety of any withdrawn amount into a single-premium annuity plan provided by the same insurer.

  • 60% of the accumulated funds can be withdrawn while the remaining 40% can be invested in a single-premium annuity plan.

  • 50% of any withdrawn amount can be invested in a single-premium annuity plan offered by the same insurer. The remaining 50% can be invested in a single-premium annuity plan offered by another insurer.


Life insurance is the key to a safe future and choosing the right cover amount is the most important aspect of it. We hope you can now calculate the appropriate coverage you need and make an informed decision.

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