You may have heard the adage, ‘Life is priceless.’ You cannot replace the loss of human life. However, life insurance plays a vital role in giving your family financial protection and ensures that they have enough money to sustain themselves for a few years, at least in case of your untimely demise.
A critical question to ask here is, ‘how much cover do I need?’ A popular number for life insurance coverage is Rs. 1 crore. While an eight-figure sum assured may be large enough, most people tend to buy a policy without giving much thought to the coverage they may need. If you, too, are questioning yourself, how much life insurance do I need? We are here to help you.
- Know your life goal
Most of the major life goals would require adequate finances to accomplish them, right? For instance, you may want to send your child overseas for education. This would need a sizeable amount to pay for university/college fees.
However, if something untoward happens, your family may compromise on the child’s education goals due to a lack of funds. The purpose of buying a life insurance policy is to provide sufficient financial backup to your family. So, the coverage must be high enough to help them maintain their current lifestyle.
Having a list of important life goals will give you a fair idea about the amount your family will need to fulfil those goals, and you can make an informed decision. Also, you can use the life insurance calculator to determine the premium you must pay for the coverage you choose.
- Age
Your age at the time of buying life insurance is a critical factor to consider while choosing the insurance cover. Your financial needs may change at different life stages. For example, if you are young, in your 20s, you may not have many financial responsibilities or dependent family members. In such a situation, you can purchase life insurance with lower coverage.
However, as you grow old, your responsibilities and liabilities may grow. When you have dependents, you would want to cover their future needs. At this stage, you can increase the life cover by a suitable percentage so that your family can maintain their lifestyle even in your absence.
- Income
Whether you are self-employed or a salaried individual, you may understand that managing unexpected and sudden expenses is challenging. For many people, regular income is not enough to meet everyday expenses. However, irrespective of your earning, you would want to give the best of everything to your family. Hence, buying life insurance is critical.
While deciding the coverage amount you need for the family, you must assess your income and the policy premium. While you would want to get high coverage for your family, your income must support the premium payment expenses so that you can keep the policy active in the long run. Remember, not paying the premium on time would mean your policy will be cancelled, and your family won’t get the insurance amount.
The best way to choose the right insurance cover is to find a balance between premium and coverage. Most experts recommend having a life cover that is at least 10-15 times your annual income.
You can use the following formula to choose the right insurance cover.
Sum assured = Your annual income x 15
Let us understand this with an example.
Suppose your annual income is Rs. 15 lakhs, from the above formula,
Sum insured = 15 lakhs x 15 = 2, 25,00,000
The above formula is an excellent reference to start, you must also consider other factors and choose based on what suits your financial profile the most.
Now that you are aware of the critical factors to consider, carefully assess your needs, goals, and income and select the right coverage. You can also consult an insurance advisor who may guide you through the process.
