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Life insurance: What is the ideal amount of coverage for you? MintGenie explains

Life insurance is about financial protection for your loved ones. The most efficient way to do that is through a term insurance policy. Photo: iStockPremium
Life insurance is about financial protection for your loved ones. The most efficient way to do that is through a term insurance policy. Photo: iStock

  • The amount of life insurance coverage should be sufficient to financially support your family when you pass away, and the cost should be affordable. It is suggested that you have at least ten times your annual income in life insurance. Let's look at the following article to learn more about the subject.

This is the most important question which arises in the mind of the individual before buying the policy. The answer to the query is very simple, the individual should look out for financial needs and wants, so that the amount thus received after their demise can be used by the family members efficiently.

Deciding the correct amount for your financial needs is not actually a tedious task but requires you to keep in mind some factors. But before understanding the factors, let’s glance on the meaning of a term life insurance policy.

Term Life Insurance Policy

Term Life Insurance as the name suggests is for a fixed tenure where the insured pays premium to the insurer for a fixed number of years and in return the insurer pays the sum assured to the family members or nominee in case of demise of the policyholder.

Term Life Insurance doesn’t provide the amount at the maturity of the policy, while providing a huge amount of coverage in comparison to lower premium rates.

Factors affecting the right amount of Life Insurance

Current Annual Income

Annual Income is the first factor to consider while deciding your life insurance coverage. 10 times the annual income is the thumb rule used while deciding the coverage, but considering the inflation rate, increase in standard of living it is ideal to have the coverage which is 20 times your annual income.

For example, if an individual has an income of 10 lakhs per annum, it would be a rational decision to opt for a cover that offers 2 crore. This amount will help the family in their daily expenses and to maintain their standard of living at the demise of their breadwinner.

Liabilities

Financial liabilities are a crucial part in deciding the sum assured for your Life Insurance plan. In case of sudden death, the coverage can help the family members to pay off these debts and have an undisturbed life. The coverage should always ensure that the existing liabilities of the policyholder are met.

Financial Goals

The whole point of the life insurance policy is to meet the financial needs of the family after the demise of the policyholder. The coverage should at least cover the most important expenses which includes children’s education and marriage as they some up to be a major expense in our Indian households. Therefore, the life coverage must include these expenses in the case of the deceased, while keeping the inflation in mind.

Age

Age is an important aspect to be considered while deciding the coverage. Different ages have different responsibilities to adhere to and that is why your coverage should also be according to it.

Young individuals who are in the age of 25-35 should have higher coverage as currently they can pay higher premiums considering they don’t have many responsibilities and are currently in their youth. People in the age of 35-45 should have a slightly lower salary as most of the responsibilities get over by now and individuals above 45 should have much lower coverage amounts.

An average policyholder aged 25 years can avail a Rs. 2 Crore policy with 30-40 years policy term for an annual premium of Rs. 15,000 to Rs. 20,000 (this will vary from one plan to another). This is an assumed premium figure and may vary from insurer to insurer basis the product offered.

The above information is solely based on the current and previous trends and the individual is free to choose the coverage according to their needs and research.

If a person needs to buy life insurance, it is important to know what type and how much the individual requires. Not all types of policy can go hand-in-hand with everybody; the most suitable one needs to be chosen with a decent amount of research and by looking for own financial needs and security.

With technological advancement a policyholder can use online calculators which help the individuals to select the policy and the right coverage for them.

For more such stories, visit MintGenie.

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