Once you arrive at a ballpark coverage figure, let your individual circumstances dictate your precise life insurance policy combination.
At a recent conference, a panelist was asked about the importance of insurance. Without missing a beat, he said, “Insurance policies are much like the women in our lives. They could be demanding, difficult to understand & could take up our time but life is so much better knowing that they’re around”. While this elicited good-natured laughs, somewhere its relevance struck a chord. Insuring for all the ‘what-ifs’ in life can be puzzling, costly and time consuming but having the right amount of life insurance always helps.
So how much insurance is really needed to comfortably secure your family & yourself?
Firstly, there is no precise answer. One could drive themselves up a wall trying to figure out an exact amount. Having said that, it is important that a fine balance be maintained. Too much cover means higher premiums to be paid at the cost of other lifestyle spends; too little cover means leaving your dependents vulnerable in the event of your unfortunate demise.
There’s an easy way to navigate through this maze of uncertainty. While a few online tools can help reach a conclusion within seconds, there are others more complex that ask for in-depth details.
The rules are simple though, follow them to broadly estimate your life insurance needs.
Rule 1: Your income + age rule
The purpose of life insurance is simple – it aims to protect your dependents and help them maintain their current lifestyle in your absence. This rule prescribes that your cover should be at least around ten times your gross annual income. For example, if your gross income is Rs 2 lakh, you should have about Rs 20 lakh in life insurance cover.
The term of the policy is equally important. Buying a new plan, if your current plan expires when you reach your 50s, will end up being very costly. Take a plan that extends till the end of your working life to reap benefits.
Rule 2: Income + one-time needs rule
If you have just started a family and have young kids, you might want to factor in a number of one-time needs that will crop up at various life-cycles. This rule suggests you have insurance equal to ten times your gross annual income + total of the basic one-time needs like your child’s education, child’s marriage, current loans (home/car), etc. In the unfortunate circumstance of you not being around to provide for your young family anymore, solely having a policy to cover your income deficit might not be the best option.
Rule 3: Your disposable income should dictate premium payment
While the first two rules will help you estimate an insurance cover that suits you best, remember that the amount should not exceed your disposable income capabilities. In simple terms, your everyday expenses should not end up getting compromised upon to pay insurance premiums.
Rule 4: Always take inflation into account
No matter how thorough you are with jotting down all your current and future expenses, if you’ve not taken inflation into account you might be in for a surprise. There could even be a negative rate of real return at the time of maturity of your insurance policies, that might come as in as an unpleasant revelation.
Rule 5: Always review the policy periodically
Change is the only constant. Life is full of unanticipated twists and turns. Your current life situation could change - you might get married or divorced, you might decide not to have children, you might want to sell your car and travel. It’s important to review your life insurance policy every now and then to ensure it’s still relevant and that it will pay out an adequate amount to the right person.
Everybody needs to know how much to insure for and these rules should act as a great starting point. Once you arrive at a ballpark coverage figure, let your individual circumstances dictate your precise life insurance policy combination.
While I started this article with an analogy of insurance policies and women, it’s only apt that I end it stating that insurance policies have nothing in common with men. An insurance policy will eventually mature. Us men? Well, the less said the better.The writer is Director-Sales & Marketing, IndiaFirst Life InsuranceThe Great Diwali Discount!
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