Life Insurance: How much is enough?

Life insurance is definitely the most powerful financial planning tool, as it provides financial protection to the family, in case of unfortunate death of the individual. If you don’t have savings and you have dependents, a life insurance is a necessity. It is important to finalize how much coverage is enough. A major criterion for determining how much life insurance is needed is based on how big a fund would be required by your dependents to carry on their life without facing any hardships.

You may consider the below mentioned factors while calculating the amount of life insurance cover you may require.

Debts you have: All your debts should be covered in full while calculating the cover. Your debts may include home loans, car loans, credit card payments, personal loans etc. Don’t forget to include the interest payable on principal of all the loans.

Replacement of your income: Your income level is a major determinant in deciding  the size of your cover. If you are the sole breadwinner of the family, the insurance should be able to cover your income. The inflation rate should also be considered. Experts suggest a cover equivalent to 10-15 times of your annual income.

Routine monthly expenses: House rent, utility bills, cost for domestic help, child education , food expenses, travel expenses, routine medical expenses etc. should also be considered while calculating this insurance.

All future obligations: Your child’s higher education fees and marriage expenses should be calculated and included in the cover required. Consider all other costs and expenses which you think your family might struggle to cope with, in case you are not around.

Apart from these factors, there are other factors which will impact your sum insured. Some of these are:

Age: Your age plays an important determining factor in calculation of your life cover. If you opt for a plan earlier in your life, the premiums you would be paying will be less. At the same time earning levels are low in young age hence the sum insured can be progressively increased with increase in earning.

Your savings and back up assets: How much you are saving currently and assets you posses, will also determine how much life insurance you would require in future. If your savings are good enough and you have some alternate source of income, you would require lesser coverage.

Group insurance by employer: Before buying the cover, do not forget to check the amount of term insurance being offered by your employer in case of your sudden  death. Many companies offer cover which is 3-4 times of the employees’ salary. This would mean a lesser amount is required in the cover.

Affordability: This is a very important factor to be considered while calculating cover. Opting for higher cover would mean higher premium amount. If this leaves you struggling with the current financial situation, you might have to opt for a lower insurance cover.

Optional Riders:

1. One may consider opting for a critical illness cover for protection against critical illness like cancer, heart attack etc. This cover will help clear hospital bills if the insured die because of such illness. Critical illness premiums are expensive but the growing cost of medical expenses would put additional burden on family in case of death by critical illness of the insured. This cover provides peace of mind to insured.

2. Personal accident rider: This covers death due to any accident. For those who are younger, the scope of death due to illness is less but chances of death due to accidents is high. Cost of this personal accident coverage is less hence it is advisable to add this rider to increase coverage at a much lesser cost.

It is always advisable to do extensive research and properly view your current situation to determine the amount of life insurance cover.