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Here are 4 Ways to calculate your Life Insurance Coverage

Commonly, people take up a life insurance policy with a cover that they don't require or with a cover that will not suffice. Many crucial factors will determine the coverage you require, and this article attempts to enlist them through four (or five) methods to calculate the coverage you require.

Also, life insurance is not a take- once- and -leave process. While you realize each milestone in your life- may it be your career, your marriage, or raising your children, you need frequent life insurance renewals to cope up with your new lifestyle, income levels, and liabilities. This article also focuses on the importance of life insurance renewal and the factors affecting the same.

Ways to Calculate your Life Insurance Coverage

Here are the 4 different ways with which you can calculate your life insurance coverage:

Human Life Value

The human Life Value or HLV method determines your life insurance cover following your life value. Here, your life value is your monetary value or your capitalized value for your remaining lifespan considering the needs and requirements of your family. The concept is simple- your unfortunate demise shall not affect the economic conditioning of your dependants in any manner.

In this method, your life value is calculated based on:

  • Your age and life expectancy
  • Your occupation
  • Your present expenses
  • Your future expenditure
  • Your current income
  • Your future income
  • Your retirement age

The current rate of inflation also determines your HLV.

HLV calculators are available on the official websites of leading life insurance firms.

Income Replacement Value

Income Replacement Value determines your life cover following your annual income. This is a very basic method of calculating your life cover. Your Income Replacement Value can be obtained by simply multiplying your annual income with the remaining years to attain the retirement age.

Required cover = Annual Income x Remaining years for retirement

Needs Analysis

Needs analysis is a comprehensive approach that determines your life insurance cover based on the daily expenses of your dependants. The time required to drive your family forward by ensuring that the daily expenditures are met to be determined by the expected lifespan of your youngest dependent.

This approach considers the following to determine your life insurance cover:

  • Number of family members
  • Liability and loans
  • Education and marriage of your children
  • If your partner is not working, arrangements for his/her daily needs
  • A lifestyle that you aspire to offer your dependents
  • Any other non-enumerated needs

On adding the expenditures mentioned above, the result will be the amount that your dependents may require this day, provided the wrath of time befalls you today.

Now, you’re supposed to subtract the value of your assets and your present life insurance policy. The result is the income gulf that you’re supposed to cover through your life insurance coverage. However, the assets shall not include your house and your vehicle.

Required cover = [Needs (Both short-term and long-term) + Expenses] - Resources/ Assets

Underwriter’s Thumb Rule

Underwriter's thumb rule determines your required insurance cover as the product of your annual income with a constant that your age group determines. That is, if your age falls between the domains of 20-30 years, your life insurance cover shall be equivalent to at least twenty-five times your annual income. However, if your age falls between the domains of 40-50 years, your life insurance cover shall be equivalent to at least twenty times your annual income.

Required Cover = Annual Income x ‘k’; where ‘k’ is a constant that depends on your age.

Percentage of Income

This method requires you to spend six per cent of your annual income along with one per cent of the same for each family member.

Required Cover = 6% of X + (1% of X*Y); where X is your annual income and Y is the number of dependents.

Why Should I Renew my Life Insurance Cover?

Your life insurance cover is not a constant entity that will suffice at every point in time. It needs to be backed with frequent revisions depending on a myriad of factors. At every single milestone of your life, life insurance renewal is to be done to address your dependant’s concerns in case of your unfortunate demise. And hence, the methods to calculate your policy cover will be of much use to you every time when you achieve something in your life.

Financial crisis not only comes from the absence of funds but from the shortage of funds too. You cannot afford to recline your family to how it was twenty years ago after your demise. Such issues are to be addressed on a regular basis to maintain parity between your life cover and your requirements that change with time. So, life insurance renewal becomes inevitable.

What Factors Should I take into Account for Renewing my Life Insurance Policy Cover?

On life insurance renewal, you're supposed to take into account at least five factors, viz.

Changes in Career/Promotions/Pay Revision

You might’ve taken your insurance soon after your debut job. With a change in career or promotions or timely pay revisions, you’re likely to receive more income. This will subsequently affect your needs and requirements as well as that of your dependants. This will possibly lead to a sophisticated lifestyle with a higher expense. Your unfortunate demise may make your dependents financially crippled without proper life insurance renewal as your cover was in sync with your previous income and your previous lifestyle.

More Income = More Tax

With a hike in the income drawn by you, you’ll naturally end up paying more tax than before. With a proper life insurance renewal, you can avail of tax exemption under Sec 80C of the Income Tax Act, 1961.

Marriage: A Revolution in your Life

Leading a married life is not very easy. Marriage is a revolution in one's life, and after marriage, your expenses will naturally increase along with your dependents. More children mean more dependents, and without adequate life insurance renewal, your cover will not suffice, keeping in mind the number of dependents that you have.


As mentioned before, more children mean more dependants, and necessary life insurance renewals are to be made to cope with the financial requirements of your family. Moreover, your children's education, marriage, etc., will also be a crucial factor that will determine your cover.


Buying a house or a car brings joy to you and your family. However, have you thought of the liabilities that come with them? Make sure that your life insurance cover is in sync with the loans and liabilities that come with them. Adequate life insurance renewals are necessary for your family to cope up with these liabilities in case of your unfortunate demise.

Over to you!

Life insurance cover has to be altered from time to time to meet the present financial and other requirements of your dependents, and this article has enumerated the reasons for life insurance renewal and factors that affect the same.

There are cases when people become confused as to determine their life insurance cover. With a plethora of factors affecting it, this article has analysed five different methods of calculating your life cover in sync with your preferences, requirements, liabilities, income, and assets.

Finally, frequent life insurance renewals are inevitable and are intrinsic to the ultimate goal of your life, i.e., the welfare of your family.

Disclaimer: Paisawiki does not endorse, rate, or recommend any particular insurer or insurance product offered by an insurer.

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