Congratulations! You have taken the right step in deciding to go in for a life insurance cover. But the question of how much cover is sufficient continues to perplex you and there seems to be no correct answer.
Insurance needs vary from person to person and even for the same person it varies depending upon his life stage i.e. whether he is single or married, with kids without kids, number of dependent family members, level of income etc.
So every person to whom you have put this question has his own take on the quantum of sum insured necessary, adding to your confusion.
Relax, just follow the guidelines given herein under and you can yourself calculate the correct amount of insurance coverage for yourself.
Duration of cover
The first thing that you need to decide is the duration of the life cover that you need. It can be a lifelong cover or only for a certain number of years depending on the purpose of insurance i.e. for the marriage of your children or for their higher education. This will also vary according to your age, number of your dependents and their age, earning capacity etc.
According to a widely used thumb rule, your individual insurance cover should be at least around eight to ten times your gross annual income. Thus if your gross annual income is Rs 5 lakh your life insurance cover should be around Rs 40 to 50 lakh.
If your spouse too is gainfully employed you can afford to go in for lower insurance cover if not you should stick to the thumb rule given above. If you can afford it would be better to go for the higher limit.
If you are unmarried then naturally your responsibilities are majorly towards yourself and your parents but if you are married then the whole financial responsibility scenario undergoes a sea change. In this case, the quantum of cover you should opt for will depend on the number of your children, their age and future expenses pertaining to their schooling, higher education, marriage etc.
Consider your current lifestyle and the expenses that would be required to maintain the same lifestyle in future in the unfortunate event of your demise. Suppose your monthly expenses come to Rs 30,000 then the quantum of life insurance should be such that these expenses are met through the interest your family may earn from the sum insured that they will get. Do not forget to take into account the likely impact of inflation on your family’s lifestyle while doing these calculations.
Assets and Loans
As a general rule, the more your physical assets like house, land etc the lesser amount of life cover is needed. Do not forget to add other assets like various investment options like Mutual Funds, Shares, and Debentures etc that you have invested in. The same principle applies inversely to loans. You may want that your existing car or home loan should not prove to be a drain on your family’s finances even in your absence and that they continue to enjoy the benefits of the loan. Decide on the sum insured accordingly.
Last but not the least, your premium paying capacity
The amount of cover you should opt for should be in line with your premium paying capacity. Some amount of sacrifice of current needs is essential for future safety but it should be within reasonable limits.
Keep in mind that there is no one-size-fits-all solution so the amount of cover, as well as its duration, varies from person to person and on the basis of his circumstances but the points given above can help you arrive at a suitable insurance cover required to lead a stress-free life.
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