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When choosing a life insurance policy's coverage, keep in mind that the goal is to provide financial assistance to your family and dependents if you are no longer able to work due to a chronic condition or disease. To accomplish this, discover your financial objectives and then estimate the coverage you will require to achieve those objectives.
However, the lack of knowledge of the parameters on which this step should be based can lead to financial hassles later in life. Thereby, to help you out, here’s a list of important parameters to consider before calculating the right amount of life insurance.
Family Goals and Expenses
Your family goals and expenses play a major role in determining the amount of sum assured required. The entire purpose of insurance is to help your family in maintaining the lifestyle you have always provided them in case of any mishap. God forbid, if something happens, life insurance helps your family in fulfilling their financial needs such as higher education and marriage, both of which demand a significant amount of money. Therefore, your life cover must provide for such potential expenditures in the future, while also taking inflation into account.
Your Present Age
Your age at the time of purchasing life insurance is an important factor in determining the sum assured. If you buy life insurance at an early age, you can get a large sum insured for a low premium. It is due to the lower risk of any serious conditions or other such incidents. Also, as we grow, our financial requirements and objectives change. In your twenties, you may not have many financial responsibilities, however, if your family expands, your expenses are likely to increase as well. So, getting a decent life insurance coverage amount for your family will allow you to keep maintaining your current lifestyle.
It is said that your present annual income is the most essential consideration when buying life insurance. Generally, the thumb rule for deciding on life insurance is '10 times the yearly income' but high rising prices and soaring living expenses today demand at least 20 times your annual income to satisfy your financial needs.
Number of Working Years Expected
It is better to have an idea of when you want to retire. It is suggested to have a time frame in mind for which you will need to plan in advance to pay for certain commitments. Payment of life insurance premiums, which also becomes a responsibility, can be accomplished during your working hours. With your life insurance policy, you can choose a limited pay option to end paying the premiums early while the policy continues until a later age. Similarly, you may arrange to get a monthly income as well as life insurance coverage through various life insurance policies.
Any Financial Debts/ Liabilities
Another important element to consider before choosing the sum insured for your life insurance policy is your financial liabilities which can be your existing loans or debts. Unfortunately, if you die young, your family may struggle to manage your loans or EMIs along with the domestic bills and especially if you were the sole earner. Therefore, always check that the coverage is adequate to cover all of your existing and future responsibilities.
Made up your mind to get life insurance? Make sure you calculate the right sum assured by keeping the above parameters in mind. These parameters will give you an idea of what average amount you’ll be paying for your life insurance but this also depends upon other factors like where you live and other personal factors. So, make sure you do your proper research and make a wise decision about buying the right sum assured.
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