Food, clothing, and shelter are the basic necessities of life, after fulfilling them, we all think of good health, luxury, and quality living. For living a comfortable life in future, it is imperative to invest today in some lucrative avenues that will pay off in a timely manner. To keep your dream of a healthy and wealthy future intact, we recommend securing it with a life insurance plan.
A life insurance plan will help your loved ones to live the life you have dreamt of. However, a life insurance policy will only be beneficial if it is capable of providing adequate coverage. So how do you determine the adequate coverage?
There is no hard and fast rule that can help you decide the amount of life cover you require. Nevertheless, listed below are the several factors that determine the amount of life cover you need. By considering these factors, you can arrive at a rough estimate about the life insurance coverage required.
- Current Income Level:
- All life insurance policies require payment of a premium on annual, semi-annual (half yearly), quarterly or monthly basis. The amount of premium paid should be in multiples of the current income level such that you will never be underinsured at any point of life.
- Present Age:
- Age is a very important factor that determines the amount of life cover. As your age progresses, the premium rates for life insurance increase accordingly. If you choose to buy insurance at a younger age, you can get more coverage at lower costs.
- Determine Your Minimum Needs: - .The main objective of a life insurance policy is to offer adequate amount of financial support to meet the basic needs of the family when the bread winner is not around anymore. In order to determine the cover amount, you should assess your basic financial needs in the first place. The minimum needs should be calculated taking into account the current lifestyle, loans, and other liabilities as well as factor inflation in daily expenses.
- Income Rule: - The income rule can be used as thumb rule to estimate the amount of coverage required as per your income. According to this rule, a person’s individual insurance cover should be at least around eight to ten times his gross annual income depending on his age. For instance, a person aged between 46 to 50 years with an annual income of Rs. 1 Lakh should have an insurance cover of at least 8 to 10 Lakh. For younger ages it should be higher.
- Consider Liabilities: - While deciding the amount of life insurance cover it is imperative to consider all your debts, including home loan, vehicle loan, other personal loans, long-term fixed rate mortgage payoffs, and credit card bills.
The final decision of life insurance cover should be a balance of all the above factors. If you find that your minimum needs are higher than your current disposable income, do not worry. Even if you cannot buy adequate insurance immediately, you can buy the extra insurance later when you can afford it. While it's important to protect your family's well-being through adequate coverage, over-insuring is also a bad idea.
