Life Insurance Calculator

Life Insurance Calculator

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Complete Guide to Life Insurance: Making Informed Decisions

What is a Life Insurance Calculator?

Life insurance is a financial safety net that provides monetary protection to your loved ones in case of your untimely death. It's essentially a contract between you and an insurance company where you pay regular premiums, and in return, the insurer promises to pay a specified amount (death benefit) to your beneficiaries upon your death.

How Life Insurance Calculator Works?

This calculator determines optimal life insurance coverage by analyzing financial obligations and future needs. Here's how it works:

Step I: Outstanding Loans

Records all existing debts (home, vehicle, personal loans) that need immediate settlement upon death. Example shows total loans of ₹20,00,000, ensuring the family remains debt-free.

Step II: Future Financial Goals

Calculates present value of major future expenses:

Children's Education: ₹50,00,000

Children's Marriage: ₹30,00,000

Total: ₹80,00,000

Step III: Required Corpus for Family's Future

Calculates living expense requirements:

Annual Expenses: ₹7,20,000

After 30% reduction: ₹5,04,000

Net of Wife's Income: ₹4,04,000

Considers key factors:

Spouse's Age: 32 years

Life Expectancy: 85 years

Inflation: 5%

Investment Returns: 9%

Net Returns: 3.81%

Required Corpus: ₹94,91,334 (calculated for 53 years with inflation adjustment)

Step IV: Total Insurance Required

= Loans + Goals + Required Corpus

= ₹20,00,000 + ₹80,00,000 + ₹94,91,334

= ₹1,94,91,334

Step V: Additional Coverage Needed

Current Resources:

Investments: ₹15,00,000

Existing Insurance: ₹50,00,000

Total Available: ₹65,00,000

Additional Coverage Required:

= ₹1,94,91,334 - ₹65,00,000

= ₹1,29,91,334

This calculation ensures:

The calculated amount provides comprehensive financial security by considering immediate obligations and long-term needs while accounting for existing resources.

How Life Insurance Works

The mechanics of life insurance are straightforward:

Types of Life Insurance

Term Insurance

The most recommended type of life insurance due to its simplicity and affordability. It provides pure life coverage for a specific period (term) without any investment component. If death occurs during the policy term, beneficiaries receive the sum assured.

Key benefits:

Traditional Insurance

These policies combine insurance and savings, typically offering lower returns compared to pure investment options.

Unit-Linked Insurance Plans (ULIPs)

Investment-cum-insurance products where premiums are partially invested in market-linked funds.

What Life Insurance Covers

Most policies have a suicide exclusion clause for the initial 1-2 years.

Which Type of Policy to Buy?

Term insurance should be your primary choice because:

  1. Highest coverage at lowest cost
  2. Simple and transparent
  3. Allows you to invest the saved money in better investment options
  4. No maturity benefit, but that's actually good - insurance should be for protection, not investment

Remember: Buy Term, Invest the Rest

Should We Take Riders?

Riders are additional benefits you can add to your base policy. Common riders include:

Recommendation: Take only essential riders like critical illness and accidental death benefit. Avoid loading too many riders as they increase premium significantly.

Term of the Policy

Choose a policy term that covers your working years, typically until retirement age (60-65 years). Consider:

A good rule of thumb: Policy term = 60/65 minus your current age

Getting Rid of Bad Insurance Products

If you're stuck with a traditional policy or ULIP:

  1. Make it paid-up: Stop paying premiums but keep the policy active with reduced benefits
  2. Surrender the policy: Cash out early, but be aware of surrender charges

Paid-up Policy: When you stop paying premiums on a traditional policy after paying for minimum required years (usually 3), it becomes paid-up with reduced benefits.

Children's Life Insurance

Avoid buying life insurance policies in children's names because:

  1. Children have no income to protect
  2. Insurance should cover earning members only
  3. Poor returns compared to other investment options

Better alternatives for children:

Who Should Buy Life Insurance?

Should Buy:

May Not Need:

Key Takeaways

  1. Buy term insurance as your primary life coverage
  2. Avoid mixing insurance with investment
  3. Calculate adequate coverage with the help of the Life Insurance Calculator (above).
  4. Buy early in life to lock in lower premiums
  5. Disclose all medical conditions truthfully
  6. Review coverage periodically as life circumstances change
  7. Focus on protection, not returns

Remember, life insurance is not an investment - it's a protection tool for your family's financial security in your absence.