Buying insurance is important. However, even more important is to determine how much insurance to buy.
So how much insurance is adequate? This is not a quiz question, so do not attempt to answer it right away. There are a few things you need to consider before you can arrive at an approximate figure that will ensure the future of your family is secure. So what are the things you need to consider?
Annual gross earnings: A good thumb rule is to take your annual gross earning and multiply it by 12.
Liabilities: Consider all your debts, including home loan, vehicle loan, other personal loans, long-term fixed rate mortgage payoffs and credit card bills.
Income Replacement: The objective of life insurance is to ensure that your family can live the same lifestyle after you as they do now. Calculate the amount of money your family may need for sustenance annually. You can include items such as groceries, education fees and other household expenses.
The summation of the above minus liquid assets, such as cash, fixed deposits, gold etc. should help you arrive at your adequate insurance amount.
A good thumb rule is to take your annual gross earning and multiply it by 12. Then add the amounts of loans outstanding and reduce any savings or liquefiable assets that you may have. That should be the right insurance amount.
The life insurance policy premium is determined basis the required cover and the term of the life insurance policy.
Disclaimer: This article is for general reference reading, please take an expert’s advice in case of doubt.