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While planning to buy insurance cover, it becomes very important to keep a number of things in mind. Find those points here.

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Calculating Your Life Insurance Requirement

Life Insurance plays an essential role in your life. It is not only important for today but serves as a financial back up for your loved ones after you. Life Insurance is provided to you by an insurance company when you pay a fixed premium to the firm and the firm in return ensures to provide you with the benefits of the same in the event of your unfortunate demise.
It shields your family from uncertainties that life has to offer. It also comes handy when you plan your life stage needs. However, how much insurance you need can vary from individual to individual. You all can’t have same insurance requirements. It is important for you to analyze your requirements before you plan to opt for a particular type of insurance. It is important for you to strike a balance. You should not land yourself being over-insured or staying underinsured. Following ways may aid you in calculating your life insurance requirements.
How to Calculate Your Life Insurance Requirements 
  1. Follow Human Life Value Approach and Expense Protection – Don’t raise your brows it is not as much difficult as it sounds. Human Value Approach takes into account your future income. This could be termed as your economic value which means the present value of your future incomes. Keeping apart the amount of money that you spend on yourself, the protection requirements that this approach says is calculated by analyzing current value of your income for the years till your retirement. 

    Expense Protection is the amount that you feel would be enough to suffice your family’s future needs and aims. While calculating this it is important for you to take into account the inflation that tends to diminish the value of money. 
  1. Identify Your Future Financial Goals – This is another factor to be considered while you calculate your life insurance requirements. It is important for you to understand your future financial obligations that stand ahead of you. This would include your child’s higher education expenses; you can not ignore the home loan or relocation of your spouse and family to some other place after your sister’s wedding etc. 
  1. Calculate Your Debts – It is important to know what you owe to others - be it short term or long term. Analyzing how much you have to shed off while you calculate your insurance requirements is of great importance. This would include your auto loans, mortgages, credit card bills etc. 
  1. Income Needs – This is another very important factor to be considered when you lay your hand on a specific insurance policy. You need to know clearly that insurance primarily serves as an income replacement. If you are the only bread earner in your family and have number of dependents and do not possess much assets than your income requirements would be fairly high. This would surely affect your choice of policy. Similarly, if your earnings do not contribute significantly in the family’s share or you have significant assets at your disposal than your insurance requirements would surely be different. 
  1. Take into Account Your Current Savings – You should not ignore what you have already saved. This would include all your fixed deposits, money in post office schemes, mutual funds bonds, PFs etc. You need to calculate the total savings and their future worth while you plan to buy yourself an insurance policy. 
  1. Take into Account Your Current Policies – If you already have a few policies in your name, it would be advisable that you calculate the sum assured of all the policies in your name. This would help you in determining how much insurance cover you need as a top up. 
  1. Your Lifestyle Would Matter – You can not ignore the lifestyle of your loved ones and yourself while you move ahead with your insurance planning. Your standard of living and your spending habits need to be analyzed before you calculate your life insurance requirement. 
  1. Insuring Loved Ones – This could be a real important factor that needs to be considered when you calculate your insurance requirements. It is important for you to insure other members whose loss would pose a financial loss to your family apart from the emotional loss that you all would suffer. 
  1. Monitoring – It is always advisable that you keep on reviewing your insurance needs every two to three years. This would give you a track of how much money you have, how much you have shed and how much more your will require. 
There can never be a universal answer as to how much insurance you require. It is impossible to universally quantify that because requirements of each one of you would vary in some way or the other. One may view it as an income replacement while other may want life insurance as purely a means to write off debts in their names while they have others to take care of their loved ones.
All you need to remember is that it is important for you to educate yourself prior to laying your hand on any of the insurance policies. Know your requirements, do not ignore inflation and make sure that you are adequately covered.