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How to Choose Life Insurance Plans According to Your Income?

Regardless of how much an individual earns, buying a life insurance policy is a very crucial financial decision. Any individual who has dependents or major debts should definitely consider buying a life insurance policy in order to secure their family financially. However, instead of blindly choosing any life insurance policy, you should always do your homework well and determine if the offered sum assured will suit your requirements.

Life insurance coverage comes with various in-built features and there are many different factors that determine the price of a life insurance policy. However, let’s not get into this discussion now and instead, focus on how to choose a life insurance coverage according to your income.

Before zeroing in on a policy it is very important to calculate the sum assured required. One can compute this very simply way by determining one’s daily expenses, pending financial liabilities (debts), and factoring in other inevitable expenses such as children’s education, weddings, etc.

Here are some these factors explained in detail:

Current Expenses-

The major motive of buying a life insurance policy is to ensure that the lifestyle of your family is not affected in any way. According to whatever income group you fall in, don’t forget to add all the monthly expenses and multiply them with 12 to determine the yearly expenditure. Some of the major expenses you need to add are:

  • Premiums paid collectively by your family.
  • Monthly expenditure like utility bills, grocery, etc.
  • Children education fees.
  • Miscellaneous expenses.

These are basic minimum expenses that should be taken care of in case of your demise. As an insured, you need to calculate these expenses over a year and also factor in the inflation factor in mind. For example, if you are 45 years old and your basic yearly expense comes to an estimated Rs. 4,00,000 per year and the inflation rate remains static at 7% per year. Then the same expenses will amount to approximately Rs. 13,00,000 a year after a decade or so. Therefore, the average amount required as an expense will be Rs. 7,00,000 per annum.

So, you will require a sum assured of Rs 1.4 crores i.e. 7,00,000* 20 (Number of years until retirement.

Income Multiplier-

Income multiplier method is another efficient method that can be used to decide the insurance cover you need. Under this technique, you are required to multiply your income by the age group factor you belong too. Thus, you can calculate the minimum and maximum sum assured you will require according to your age group and income. While using the method of income multiplier you will be required to deduct your expenditure from your net income and then use the factor of multiplication. For individuals within the age bracket of 20-30 years, the minimum insurance coverage multiplied by the income by a factor of 5 and for maximum insurance coverage multiply the income by a factor of 10. If you are above the age of 30 years, you can refer to this table.

Age Group

Minimum Multiple

Maximum multiple

30-40

15

20

40-50

10

15

50-60

5

10

 

Calculation of life insurance policy should not be made only at the time of policy purchase, but rather should be reviewed once in every five years. Thus, if required, additional policies can be bought to provide wholesome support to your family. Moreover, with the help of this method, you can figure out the amount of sum assured you should have.

Assets and Liabilities-

Buying a house is one of the biggest liabilities that one invariably has to incur in one’s lifetime and a major proportion of individuals need to take a home loan for this expense. The insured must add their home loan and any other debts to their list of liabilities, and make a separate list of assets like gold, investments made in the capital market, fixed deposits, etc. By calculating the assets and liabilities one can compute the amount of sum assured he/she will require.

Wrapping it up!

 It is a known fact that most individuals need life insurance sooner or later in life. However, it is very important to know that what kind of life insurance policy will suit you as per your requirements and how much is the sum assured that you should choose. If you choose to buy the policy online, then don’t forget to compare the life insurance policies online and avoid getting stuck with insufficient coverage that will not help you in your time of need.