How much insurance do you need? ::Business Line

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We all know about the importance of insurance and generally take some cover. But do we give a thought to whether the cover is really enough? More often than not, we mentally set a threshold limit for the premium we can spend, which in turn determines how much the sum assured goes up to.

But in reality, arriving at the appropriate sum assured involves a lot of homework. To make this job easier, HDFC Life has a ‘Human Life Value Calculator’ on its Web site. This tool helps you arrive at the ideal amount of insurance you need based on the investments you currently have and the loans that you have taken.

It seeks to do this by eliciting numerical responses from you for a few questions, which include queries on your expected returns on existing investments, the expected rate of inflation, the amount of insurance you already have and the annual expenses that the rest of your family may have to incur after your passing away.

Based on the answers, the calculator first arrives at your ‘total insurance need’. From this, it deducts the present value of all your investments and the amount you already have as insurance to arrive at the shortfall in cover.

The pitfall in the calculator is that you need to have a fair idea of where inflation is headed. Secondly, if a majority of your existing investments are in equity, the present value of your investments could vary widely from time to time, giving a sense of being over/under insured.