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How Much Life Insurance Do You Require?

Unpredictability in life can make us feel more about the financial protection of our dear ones. Life insurance is the foremost thing that comes to mind to complete such requirements. The need for purchasing the right life insurance policy has increased further in these unprecedented times.

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What is Life Insurance? 

Life Insurance is a contract in which an insurer agrees to pay a fixed amount after the policyholder’s death. In this, the insurer pays a sum assured amount to the life assured or to the assigned nominee in case the insured meets with an unfortunate demise in exchange for the payments of premium made towards a life insurance plan. 

How Much Life Insurance Do You Require? 

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 8 - 10 times your current annual salary, but the best way to determine how much it will take is to do some calculations. Determine your yearly household expenses, assets, income from all sources, and debts if any. So, figuring out how much insurance you require is more important than the type of policy you purchase. It means you have to make more efforts to gather the information you need and calculate the following:

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  1. Annual income 

    It is the amount your dependent will need to maintain their standard of living as of today. This should be enough to cover your rent or mortgage, home maintenance and repairs, home improvements, household items, and real estate taxes and insurance. It should also include health and auto insurance, utilities, clothing, food, transportation, and auto maintenance costs, plus child and dependent care, recreation and entertainment, and any other expenses they might have. This will include your spouse’s salary if working outside the home and investment income from all of the accounts you currently have. Do not include the insurance proceeds as income here. 

    Once you know how much they will need, factor the equation into how much you can afford to invest. Be certain to ask about how the insurers calculate their rates so you pay the lowest premium possible for the best coverage. Shop around, as rates do vary from insurer to insurer.

  2. Determining Risk Group 

    Insurance companies generally divide us into four risk groups, preferred, standard, substandard or uninsurable. 

    • Preferred – You are low risk. You are not sick; don’t have a high-risk job or hobby, have a clean bill of health. You pay a lower premium. 

    • Standard – You are an average risk. There might have had been some health issues in the past, but don’t have a terminal illness or a high-risk job or hobby. You pay an average premium for similarly situated insured. 

    • Substandard – You have a high-risk job, such as pilot, scaffold worker, or diver, or you have a chronic illness like diabetes, heart disease, or high blood pressure. You pay a high premium.

  3. Age 

    Age at the time of purchasing life insurance is an important parameter that determines the selection of a sum assured. Financial requirements change at different life stages. For example, in your 20s you might not have many financial liabilities, but as your family grows your liabilities also increases. Also, you are eligible to purchase the right life insurance plan at low premium rates at young ages. 

  4. Existing Financial Liabilities 

    In order to compute adequate life insurance, you are required to list out your current liabilities. Prepare a list of all the loans borrowed, and then check for different term plans that provide adequate coverage at low premium rates. 

  5. Uninsurable 

    If you have a terminal illness thus you are at high risk. The insurer will be reluctant to sell you a policy. Take note that the categorization may differ from company to company, so shop for insurance with other companies after comparing. If you have or had an illness or health condition, it is best to get in touch with a professional who deals with and get you better quotes from different insurance companies. Once you are rated “substandard,” you must disclose it to all the other insurance companies when you apply for coverage. 

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*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

Wrapping It Up!

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 the factors on which this decision should be based.

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