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If you buy a life insurance plan, one of the first questions is: How much life insurance do I need? There are several ways to calculate the right life coverage depending on your financial goals and needs. Let’s discuss in detail:
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Life insurance coverage is the sum assured amount that will be paid to the beneficiary/nominee in case of an unfortunate death with life assured or in case of outliving the policy term. The coverage also includes add-on benefits like accidental death benefits that can enhance the payout provided to the family members.
Term Plans
Once you decide to buy life insurance to protect your family or dependents, you’ll need to figure out how much to insure and how much you can afford to. The idea is for your beneficiaries to be able to maintain their standard of living without having to dip into the principal. Some say it is best to buy about 10 - 20 times your current annual salary, but the best way to determine how much it will take is to do some calculations. You must determine your yearly household expenses, assets, income from all sources, and debts, if any.
Here is an example to understand how life insurance coverage works in India:
If your current salary is Rs.10 Lacs per year. In order to make sure that your family is taken care of in case of your absence, you can consider an amount that is 10X of your yearly income (Rs. 1 Crore). In case of an unforeseen death during the policy term, your family members will be provided a death benefit amount of Rs. 1 Crore. This amount received will be exempted from tax subject to conditions U/S Section 10(10D) of the ITA, 1961.
To answer the question, “How Much life insurance do I need?” The ideal life insurance cover is different for different individuals. By the general thumb’s rule, you should get a life cover at least 10 to 20 times your current annual income. But you can calculate the ideal life cover for your profile much more easily using the human life value calculator. This calculator is an online tool that requires you to fill in your age, annual income, and existing cover amount and accurately estimate the right life cover for you.
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The factors that you should consider at the time of buying a life insurance plan are as follows:
Family’s Financial Needs
When manually calculating how much life insurance you need, one of the main factors to consider is your annual income and your family’s financial needs on a monthly basis. You need to take into account your current annual income and choose a life cover that will act as an income replacement in your absence.
Existing Debts and Loans
In case you have existing loans or debts like home or car loans or credit card debts, your family might be burdened with the repayment of these in your absence. Therefore, while choosing the right life cover, you need to ensure that the cover is enough for your family to pay off the remaining loans and debts.
Child’s Educational Future
Everyone wants to ensure that their child’s future is not compromised in their absence, and thus, life insurance with large life cover can help your child fulfil his/her financial needs and lifelong goals. Your child can use the benefit amount to pay for their higher education, business endeavours, or fund their wedding.
Adding Important Riders
At the time of buying life insurance, you need to check the available riders in your policy and add the relevant ones to the base plan. The most common life insurance riders that you can add are terminal or critical illness, accidental death or accidental disability, waiver of premium, or hospicare riders.
Age at which you Buy
The age at which you buy is important as it can impact your life insurance premium and the amount of coverage you are allowed to buy. Some insurers reduce the sum assured they offer for people over a certain age. Therefore it is better to buy a large life cover at an early age to secure your dependents financially.
* You can use a life insurance calculator to accurately estimate the premiums you need to pay for the desired life cover.
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*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
While purchasing a life insurance plan, the selection of the right life cover is a necessity. The lack of knowledge about the selection of a sum assured can cause financial disturbances in the long run. Thus, it is important to understand “How Much life insurance do I need?” and the factors on which this decision should be based.
Note: It is suggested to calculate the term plan premium on the term plan calculator online tool by Policybazaar before buying.
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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