How much insurance does one need? That’s a question we have to face in the process of buying life insurance. While deciding the policy, it is crucial to remember that the goal of insurance is to provide financial support to your loved ones, in case you (a primary breadwinner) are unable to earn because of a permanent disability or illnessand in case of sudden death. The life insurance policy you decide on should be enough to help your family maintain the standard of living if you are not there.
Before determining the life insurance amount, one must always know – What is life insurance? What are the types of life insurance? And what are the benefits of life insurance?
How Much Life Insurance Cover Should You Buy?
Determining how much insurance cover you need to buy is not actually that tiresome process. You should keep the following aspects in mind:
- Current Annual Income
The primary factor to contemplatewhile deciding your life insurance coverage is your annual income. While ’10 times the income’ used to be the thumb rule to choose the life insurance cover, rising inflation, and the increasing costs of living now require you to opt for at least 20 times your income.
So, if your current income is Rs. 5 lakhs per annum, it would be sensible to choose for a life insurance that offers a cover of Rs. 1 crore. This amount will help your family cover their daily expenses and maintain their standard of living.
- Current and future financial liabilities
Your financial obligations, like outstanding loans and debts are another aspect to consider while choosing the sum assured of your life insurance plan. In case you pass awaybefore your time, your family may have a difficult time handling EMIs along with daily expenses, especially if you were the only breadwinner. Thus, always make sure that the coverage is enough to meet all your remaining liabilities.
Financial resources that are liquid can also help your family fulfil these obligations. For example, stocks, bank deposits, or mutual funds. Therefore, you can take the estimated market value of the assets into account while analysing your needed coverage and reduce it accordingly.
- What are your Financial Goals?
Your financial goalsplay a major role in determining your coverage. The objective of insurance is to help your family maintain the lifestyle you provided, in case of your sudden death. The goals include meeting financial goals like your children’s education and marriage, both of which require a substantial amount of money. Therefore, your insurance cover must factor in these obligations that you are likely to come across in the near future while keeping inflation in mind.
- Your age at the time of getting the policy
The age at which you’re buying your policy is also crucial, because, different stages of life have different requirements. That also makes going through a life insurance policy occasionally, quite necessary. The thumb-rules for choosing a life cover for different age groups are explained below:
|(Approx. 18 x Current annual income) + outstanding loans
|(Approx. 15 x Current annual income) + outstanding loans
|(Approx. 10 x Current annual income) + outstanding loans
Preferably, you should buy life insurance when you are younger, and go for the maximum tenure possible. To secure the future of your family, you’ll need to make a well-informed decision. Start by recognising your financial goals and then evaluate the cover that you will need to meet those goals.