How Much Life Insurance Do I Need?
Published On Apr 01, 2021, Updated On Apr 26, 2021
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Buying a life insurance policy is a prudent move that guarantees financial coverage for your near and dear ones. Your life insurance coverage will depend on your financial and personal circumstances.
How Much Life Insurance I Need?
Here are certain rules that determine how much life insurance you would require to ensure that your dependents are self-reliant and financially stable to meet their expenses and pay off loans (if any).
1. Current Annual Income
The main criterion to consider in the process of deciding your life insurance cover is your present annual income. Whereas ‘ten times the present annual income’ used to be the ‘thumb rule’ to decide the life coverage, the rising costs of living and high inflation now require you to opt for no less than ‘20 times your annual income.
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2. Your Current and Future Financial Liabilities
Your financial liabilities/commitments such as outstanding debts and loans are crucial factors to consider when deciding the sum assured for your life insurance plan. If you die early, it will be difficult for your family to manage EMIs along with household expenses, in particular, if you are the only bread-winner of the family. Hence, you must make sure the life insurance coverage is adequate to satisfy all the obligations. Liquid or near-liquid financial assets will also help the family satisfy outstanding liabilities. For example, mutual funds, bank deposits, etc. Therefore, as you calculate the needed life insurance coverage, you should take into account the estimated market value of those assets and reduce the amount of life coverage accordingly.
3. Your Financial Goals
Your financial objectives play an essential part in deciding your life insurance coverage. The insurance goal is to help your family sustain their lifestyle in the event of your early passing. This involves meeting financial objectives such as your child's education and marriage, which require a considerable amount of money. Therefore, your life coverage should factor in these financial commitments you must face in the future while keeping inflation in mind
4. Your Age at the Time of Buying the Policy
The age at which you are buying your policy is also very important, because different life stages have different necessities. That also makes evaluating the life insurance policy periodically, quite necessary.
5. Coverage Tenure
When deciding the cover, it is essential to choose the policy tenure carefully. A life insurance plan cover that stops covering you when you are in your late 40s or early 50s may not be that great. Preferably, you must purchase a life insurance policy when you are younger, and opt for the maximum tenure possible.
It is important to know how much and what type of life insurance coverage you need. When you want to purchase life insurance, you must decide what you need upfront to ensure that you do not end up taking limited or inadequate coverage or costly coverage. Like an investment, it is important to educate yourself to make the right decision. Make sure you do your research properly to ensure that you have the best available life insurance plan.
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