How Much Life Insurance Is Good Enough for You?

Nov 11, 2019 | 4 weeks ago | Read Time: 3 minutes | By iKnowledge Team

Mr. Arnav had taken a medical insurance policy worth Rs.1 lakh. He had decided on this coverage amount because he, his wife, kids and dependent parents were quite healthy and had no existing health scares. One day, Mr. Arnav’s father suffered a massive cardiac arrest, and he had to undergo emergency surgery. The surgery cost ran into Rs.2.5 lakhs. Unfortunately, Mr. Arnav’s policy was only of Rs.1 lakh. Eventually, Mr. Arnav had to break his investments to pay the remaining Rs.1.5 lakhs.

Clearly, not accounting for emergencies and not calculating the coverage amount properly proved to be quite costly for Mr. Arnav, in this example. So, how will you know how much insurance is good enough for you? Though the points mentioned below can be applied to all kinds of insurance, we are going to talk about life insurance in this section specifically.

  1. Rule of thumb – Insurance cover vs. Income level

When you are taking a life insurance policy, you must remember the rule of thumb. If you are in the age group of 25 to 35, you should choose a coverage amount that is at least 15 times of your gross annual income. We take gross income here because that will consider your existing debts and other commitments as well. If you are above 35 years, it is highly recommended that you choose the coverage that is close to 8 to 10 times your gross annual income.

  1. Consider outstanding loans and one-time expenses

Add your gross annual income with your outstanding loans, if any (towards car, personal loans, home loans, etc.) You should have used a calculator to calculate the amounts that you would need at various stages of your life. These are one-time expenses, and they include expenses such as your wedding, child’s higher education, child’s wedding expenses, etc. Add these to your current gross annual income as well. The total that you have in hand is your current income plus all your future expenses (recurring and one-time).

According to experts, you must choose coverage that is 5 times this total, if you want to assure maximum financial protection for yourself and your family. When you choose a whole life insurance plan after calculating your coverage in this method, you can rest assured knowing that your family will not suffer even in your absence, because you have taken care of all their financial needs.

  1. Consider your assets or savings, if any

In the above example, your income plus expenses may show you a huge amount. When you choose a big coverage amount, you should be ready to pay a big premium as well. Therefore it is important to take stock of your existing assets and savings if any. These can include cash deposits, property, investments (short-term and long-term), PF, existing insurance policies, and all other assets. These are your strengths, and you can deduct these from the previous total that you have calculated.

For example, if the total of your income and expenses is Rs.1 crore and your assets/savings are worth Rs.25 lakhs you can deduct the latter from the former and arrive at a coverage amount of Rs.75 lakhs. If you don’t deduct these, you would have to pay a premium for a Rs.1 crore cover, which would have been costlier than what you would have paid for a Rs.75 lakhs cover.

The entire purpose of insurance is defeated if it doesn’t offer financial protection at a time when you or your family needs it the most. Therefore, it is very important to choose the right coverage amount after considering your current income, expenses, and assets. While calculating your future expense needs of your family, you need to take into the inflation factor as well to calculate the right amounts.

While it is important to opt for maximum coverage, it is also imperative that you don’t choose a plan that is beyond your affordability. You may use the services of online premium term insurance calculators to understand the monthly amount that you need to set aside for a cover that you have just calculated after analyzing your family’s needs. To know about Aegon Life Insurance’s products like term insurance, visit our home page.

Read about Sabse Pehle Life Insurance Campaign, an initiative by IRDA to create awareness on the importance of life insurance.


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