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If you have decided to take up a Life insurance plan, it is a wise step; but what may be storming your mind is how much insurance coverage you need. Major factors that affect your decision of how much coverage you need. These are:
- What is the minimum amount of financial security you need for your family?
- What is your present income; as this decides your capability of paying premiums?
- Identify your potential expenses in future, i.e. if you have got children to wed or educate, their expenses should be kept in mind.
- What is your age when you sign up for the policy? This holds great weight-age as premium rates hike as you grow old.
For deciding upon the coverage amount, you have to consider all these factors. It is quite a tough task to estimate the correct value. What adds to the difficulty is the fact that coverage needs vary from time to time. When young, without dependents, needs are low and so is the case in old age when your children are settled. Life insurance needs are high in middle age when there are many responsibilities.
There are some tips that aid you in making a broad estimate of coverage amount you need.
- Consider your Income
Consider your income as base for calculating coverage amount. Generally it is advised to take up an insurance cover at least 10 to 12 times of your gross annual income.
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- Be mindful of your expenses
While deciding the amount you need your insurance to offer, you should be mindful of your major expenses like, any loans or debts, education or wedding expenses of your children, etc. add on these expenses while deciding coverage amount.
- Capital Fund
Make a rough estimate of your family’s annual expenses and take an insurance of sum that will return this much amount as interest per annum. For example; if your family’s major annual needs are worth 1.5 lakh, and capital fund returns 1.5 lakh of interest p.a. for 15 lakh amount; buy an insurance of 15 lakh.
- Paying premiums
Large insurance cover means large premium amounts. Decide your premiums taking into account your income and expenses ratio. After meeting your expenses, you should decide the premium amount. This is important because delay in paying premium may result in rise of premium rate.
- Dependents and their needs
Take into account your family’s needs before deciding the amount of insurance. The coverage it provides should be enough to fulfill the needs of the family in absence of breadwinner. Needs of a person’s family keep on changing with passage of time; in young age when a person has no dependents to support, insurance needs are less. With time when responsibilities of family dwell up and a person needs to feed and up bring dependents, insurance needs are more. In old age, the empty nest stage, when dependents have settled in their lives, insurance needs again decline.
You should not mistakenly consider insurance as investment. It is a kind of protection. Financial returns are meager and factors like inflation make the interest rate of real return negative at the time of maturity of insurance. This makes it more important to calculate the amount of insurance coverage one needs because providing adequate security of insurance to one’s family is important but at the same time one should be careful of not over investing in the name of insurance.
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