Do I need life insurance, and how much?

Life insurance exists to replace money someone else relies on. If a partner, children or parents depend on your income, or would be left with debts, you probably need it. If nobody depends on you and your savings would cover your debts, you may need little or none. The amount is what your dependants would need, less what they would already have.

Who usually needs it

• Parents of children who are not yet independent.
• A main earner whose partner could not keep the household going alone, or a partner whose unpaid work would have to be paid for.
• Anyone whose death would leave a mortgage or loan someone else must repay.
• Rarely: a single person with no dependants and no shared debts.

How much: a needs-based estimate

India’s insurance regulator lists the factors that decide the amount: how many dependants you have, your debts and mortgages, the lifestyle you want to provide, your children’s education, your investment needs and what you can afford. Turning those into a figure takes four steps.

1. Estimate what your dependants would need each year without your income, and for how many years, until the youngest is independent or a partner reaches their own independence.
2. Add debts that would need clearing and fixed goals, such as education.
3. Subtract savings and investments they could use, and any cover you already have through work.
4. Choose a term that ends when the need does.

Term or permanent?

Term insurance pays out only if you die within a set period, such as 10 or 20 years, or before a set age. Permanent insurance, such as whole life, covers you for life and usually adds a savings element. Canada’s Financial Consumer Agency notes that term premiums are generally less expensive than permanent ones when you first buy the policy. For most people with a need that ends, term cover is the plain, comparable product.

Policies that mix insurance with investment, such as endowments and unit-linked plans, deserve care. India’s regulator points out that in a unit-linked plan the full premium is not used to buy units: charges and fees come out first. Compare the total cost with buying term cover and investing the difference separately.

The need shrinks as you get closer to independence

As savings grow, children become independent and the mortgage shrinks, the gap insurance fills gets smaller. Once your assets alone could support your dependants, you may need little or no cover. Review it when your family or debts change.

Common mistakes

• Buying a policy chosen as an investment rather than for its cover, and ending up underinsured.
• Relying only on cover through an employer, which usually ends when the job does.
• Forgetting a non-earning partner, whose care and work at home would cost money to replace.
• Overlooking the risk of being unable to work. Income protection or disability cover is a separate product, and worth considering alongside life cover.

In Nivritee

Nivritee does not model a death or an insurance payout. What it can hold: premiums as a spending line (the Other insurance line in the day-to-day expenses breakdown is for life, term, vehicle and travel cover), and a policy that matures as An insurance policy maturing under Money coming in in Life goals. The stress test Two years out of work shows what your plan can absorb if an income stops for a while. See how to enter money coming in and what each stress test assumes.