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Sometimes, people who need life insurance refrain from buying it due to a lack of clarity on how to go about the process. Or, even after getting life insurance, they can be over-insured by paying more premium than they can and compromise on their current living standards. Some may even remain underinsured.
If you want to avoid either situation and choose the right amount of financial coverage, you must assess your insurance needs and income. Your annual income gives a real insight into how much coverage you need. Your life insurance must replace your current and future incomes to be effective as a financial fallback for your family in an eventuality.
Here’s a guideline on how to select the right insurance plan as per your income.
How much life insurance should you carry?
- Assess your present and future financial needs
To understand the life insurance coverage you need based on your income, you need to consider the following parameters:
Monthly expenses
Add up your utility bills, children’s education fees, household medical expenses, etc. Also, calculate the number of family members depending on your income. The sum gives an idea of how much of your income is spent on your living expenses and how much you can set aside for the premium payment. Multiply your total monthly expense by 12 to determine your annual household spends.
Financial liabilities and pending loans
Factor in the cost of your children’s school fees, college tuition, their vocational activities, and their possible marriage expenses. The present and future costs of sustaining your dependent spouse or elderly parents have to be included in your coverage as well.
Moreover, if you have outstanding debts like a housing loan or credit card bills, calculate the percentage of income that goes towards clearing those.
Expected earning period
You need a stable source of income throughout your policy period to keep up with a regular premium payment. Therefore, you must take into account your expected years of earning and whether your income is likely to increase over the years.
Moreover, the duration for which you can support your financial dependents also depends on your income source. A typical thumb rule is to consider the number of years remaining until retirement. It can be the ideal time-span for setting your life insurance policy period.
- Calculate your ideal coverage amount
If you are wondering, ‘What life insurance should I get?’ based on your income, make the following calculations.
- Multiply the sum of your annual expenses by the number of years until your retirement.
- Add the aggregate of your financial liabilities.
You will arrive at the tentative amount of life cover you need.
You also need to assess the amount you can set aside for the payment of premium. Based on this amount, you can analyse the different plans offering varying premium rates and scopes of coverage.
Moreover, you should also consider the inflation rate. It increases the amount needed to maintain your family’s livelihood in the future.
- Use the Income Multiplier method/ The Underwriters Thumb rule
An alternative way to estimate the amount of financial coverage you need is the Income Multiplier Method.
Under this method, multiples of annual incomes are assigned to age groups. Based on this, you need to multiply your annual income with the assigned multiple.
For example, it is advisable for persons between the ages of 20-30 years to have life insurance coverage worth 10-15 times their annual income. Therefore, a person in the 20-30 years age group, having an annual income of Rs.5,00,00, should have a life insurance coverage of Rs. 50,00,000 – Rs. 75,00,000.
You can refer to the following table, to get an idea of how much life insurance coverage you might need:
Age
Multiple of annual income
20-30 years
10-15
30-40 years
14
41-50 years
10-12
51-60 years
6-8
TATA AIA’s range of term life insurance and whole life insurance plans offer unparalleled benefits and suit diverse income groups.
Should I buy whole life insurance?
Whole life insurance plans have more premium rate than term plans, but also provide coverage as long as your family needs the support of your income. If you anticipate having family members looking to you for their financial wellbeing well after retirement, a whole life plan can be useful.
TATA AIA offers an option to avail whole life coverage, up to 100 years of age, with all its term insurance plans.
Should I get life insurance in my 20s?
You may not have many financial obligations or dependants in your 20s. But old age often brings health complications. Also, the older an individual, the closer the person is to their life expectancy. Hence, if you wait to buy life insurance, you might have to pay more premiums. Hence, buying life insurance in your 20s can be cost-effective. The premiums, tax*-deductible under Section 80C, will also help you reduce your income tax* burden.
To conclude
Choosing a life insurance policy based on your income is crucial to avoid missing premium payments or buying a policy that does not provide adequate coverage. Once you assess the coverage need based on your income, expenditure, the number of dependents, etc., you can compare different policies and select a plan offering premium rates that suit you best.
L&C/Advt/2023/Mar/0729
