How Much Life Insurance You Must Buy?

25-August-2021 |

One of the main reasons we buy life insurance policies is to ensure that our family receives enough funds to provide for themselves in the event of unforeseen situations. But one of the questions that you will face when purchasing the plan is 'how much life insurance you must buy?' To find the insurance coverage amount and secure your family, you will have to make smart and well-informed decisions today. 

If you wish to learn how to calculate the amount of life insurance coverage you need to purchase, you must read on. 

 

How does life insurance work?

You need to pay a pre-determined premium amount for a specified tenure to the insurance company in a life insurance policy. The insurance company will provide your beneficiaries listed in the policy with the insurance coverage if something happens to you. To get the utmost benefits from your insurance plan, you must keep up with the premium payments and ensure you opt for a good insurance coverage amount. 

 

How to calculate the life insurance coverage needed?

 

  1. Calculate the monthly expenses of your dependents:

    If you're married or have a family that is dependent on you, you should first calculate the household's monthly expenses. These monthly expenses will include your children's education, monthly repairs, groceries, unexpected expenses, etc. You need to calculate the expenses required carefully, as it will give you a clear picture of the amount your beneficiaries will need in your absence. You should also factor in inflation rates when calculating the expenses. 

  2. Factor in your liabilities:

    Your financial liabilities are those liabilities in your life that require a decent amount of financial funding. These include outstanding debts, financial obligations, loans, etc. In the event your passing away, your financial liabilities will fall on your beneficiaries and loved ones. It can be quite a burden for your family to deal with these liabilities in your absence. Therefore, you must ensure that your insurance coverage is big enough to meet all of your existing financial liabilities. 

    Financial assets which are liquid or can be considered near-liquid can help your family meet these liabilities. For instance, stocks, mutual funds or bank deposits may come under these. You can thus, take the approximate market value of the assets into account when calculating the required insurance coverage and reduce it accordingly. 

  3. Consider important goals and life events:

    When you're an earning member of your family, you must have certain financial objectives. These targets will play an important role in calculating your insurance coverage. The entire point of insurance is to assist your family in maintaining their lifestyle and fulfilling certain needs in case of unexpected circumstances. These may include your children's education and marriage, buying a house, retirement plan, etc. Aspirations like these require heavy financial assistance. Therefore, when you're calculating the insurance coverage amount, you must keep these in mind.

  4. Factor in your existing wealth:


    Your existing wealth will include factoring in your balance sheet and your investments over the years. Your family can access these investments in the event you pass away. These include your fixed deposits, provident fund, mutual funds or even your real estate. Therefore, once you have a clear picture of the amount your family will get through your existing wealth and investments, you can accordingly deduce the amount for your insurance coverage.  

  5. Keep in mind a retirement plan for your spouse:

    You must be mindful of your spouse's retirement funds once they enter that phase in life. Hence, you need to include a financial plan that will grow over time to manage their retirement smoothly. 

  6. Your age when you buy the policy:

    Your age when you're purchasing the policy is also relatively important. This is because when you move through the different stages in life, you will have different requirements. Therefore, it becomes important to regularly evaluate your life insurance policy and your needs from the policy. 

  7. The tenure you want the coverage for:


    When planning the insurance coverage, you must pick the policy tenure carefully. A life insurance policy cover that stops covering you when you've reached a certain age may not be that ideal. You must purchase the plan when you're younger and go for the highest tenure you can get. 

 
What will happen if you don't select the correct coverage amount?

When you don't get the appropriate insurance coverage, you are putting your loved ones at risk. If you choose a lower coverage than needed, your family may not sustain their everyday expenses or plan for their future. If you overestimate your needs, you will end up buying a costlier coverage, putting a strain on your finances due to the hefty premium payments.

You can go online and visit your preferred insurer's websites to compare life insurance policies and get a better understanding of the insurance coverage you'll get from a particular plan. Tata AIA Life Insurance allows individuals to purchase the plan and make life insurance premium payments online.

With TATA AIA online premium payment option, you can make the payments from the comfort of your home. Our life insurance plans, including term insurance, life insurance savings plans, ULIP and retirement insurance plans offer extensive coverage through the various policies. The coverage included in this plan allows increasing the coverage with riders#, ability to attain medical opinion, whole life insurance policy coverage and much more. 

 

Bottom Line

When you're purchasing an insurance plan for your family, you must ensure that you take extra measures to ensure the coverage is adequate for your family. When you follow the steps listed above, you will be able to ascertain the correct amount of life insurance that you need to invest in. A good practice to follow when planning for your insurance is to evaluate your insurance needs at regular intervals as it is rightly said that “In case you can’t be there to catch them, make sure you leave a safety net.”


L&C/Advt/2021/Sep/1502

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Disclaimer
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  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

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  • #Riders are not mandatory and are available for a nominal extra cost. For more details on the benefits, premiums and exclusions under the riders please refer to the Rider Brochure or contact our Insurance Advisor or visit our nearest branch office