Kathmandu. You realize how important it is to bear insurance risk. You also agree that purchasing an online plan can save you substantially. You stop when asked how much life insurance you’d like to buy.
Is it the best way to proceed based on a windy estimate of how much there might be an adequate actuary? Wrong! It may not be easy to decide on your own how much insurance a person will need.
Did you know that the average sum insured in Nepal is less than Rs 1 lakh? This means that the average monthly income of the insured is only Rs 2,000. Which is much less than the income of the average Nepali.
Understanding how much insurance you need is just as important as needing insurance. There are two main ways to determine an actuary. In which you can calculate the insurance amount you need from the need-based method and the Human Life Value Calculator.
Need-based method
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Let’s start with a need-based method. It calculates the sum insured based on the specific needs of the individual. It keeps track of daily family expenses up to the age of the youngest member of the family. The need-based method includes financial obligations like home loans, car loans, etc. and the amount needed to support the dependents for the desired period.
It may also include money needed for specific family needs, such as a child’s education or marriage. For example, if a person has a home loan of Rs 50 lakh, a car loan of Rs 5 lakh and his family needs Rs 50,000 per month in case of his death, then the life insurance should be equal to Rs 50,000 per month for the family and the remaining home loan and auto loan repayment should take into account inflation.
Life-Based Methods
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Another way to calculate your insurance needs is to use the Human Life Value Index. It’s a calculation of your financial value. It takes into account your current income, assets, and expected growth in income.
Some basic financial responsibilities have been added to it. Which gives you a number that represents your financial value to your dependents in case something happens.
The number is a point of reference and should be put in the context of your current ability to save money. Also, calculations based on human living values and needs are inevitably dynamic goals and should be reviewed every 5-7 years. The ultimate goal should always be to plan in such a way that your family does not have to compromise on their yet-to-be-met needs in your absence.
