What is the Right Amount for a Life Insurance Cover?
If you are above your late 20s, you must have heard about life insurance. Life insurance ensures the financial security of the sole or co-income earner’s family in case of his/her unfortunate demise or an unforeseen eventuality. That is why life insurance plans form a core part of financial planning. While there are several types of life insurance plans you can choose between, figuring out how much life insurance cover you require is the first step in buying life insurance.
Which life insurance policy is best?
While there is no fixed answer to this question, as the life insurance policy you get has to suit your needs - an unmatchable type of life insurance is term insurance. As it provides a large payout (called the sum assured) in exchange for affordable periodic payments (called the premium), The generous yet cost-efficient nature of a term plan makes it one of the best life insurance policies.
Which is better - term life or whole life insurance?
While a term insurance plan can give you a high amount of insurance cover at low premium prices, it does not offer any benefits in case you survive the term policy. That means you will not receive the sum assured if you survive up to the policy end date. However, some plans pay back the premiums paid up to the expiry date, so you don’t lose out on your original invested amount.
On the contrary, whole life insurance plans give you:
- A death benefit (that is the guaranteed1 sum assured under the policy
- A surrender benefit (that is an amount you receive in case you cancel the policy)
- A maturity benefit (in case you survive the tenure of the policy)
Moreover, as opposed to a term plan, whole life insurance policies have a longer duration. They might require the payment of higher premiums but give you more financial protection. However, depending on your preference and budget, you can choose either a term policy or a whole life policy.
How do I choose the right term insurance cover amount?
Choosing the right life insurance plan and arriving at the right life insurance cover is very simple once you know how to go about it in a step-by-step manner. The general rule of thumb is getting insurance cover up to 20 times your annual income for a tenure that lasts up to your retirement age at least or the completion of your financial responsibilities.
To find the right life or term insurance cover amount for you need to:
1. Calculate monthly or annual daily expenses
The first step in determining the amount of life insurance cover is to calculate the day-to-day expenses (such as groceries, utilities, bill payments) of your loved ones. Say, if your income is ₹10,00,000 per year, and your family requires ₹50,000 towards monthly expenses, you need to have ₹1,20,00,000 for 20 years after your absence.
Formula = Annual income x 20
(The figure 20 is a general rule of thumb and purports to account for inflation, the rising costs of healthcare, education, and fluctuating premium rates.)
2. Assess your financial liabilities
Your day-to-day expenses will not be the only part of your family’s lifestyle. In your absence, any pending financial liabilities such as a home/vehicle loan, any premiums towards investments, health care expenses of your loved ones, and the like will come into the picture.
Formula = Annual income x 20 + pending loan/EMI amounts + any other financial liabilities
3. Factor in future life goals
Apart from your daily expenses and long-term liabilities, you will also need to have finances for your family’s future life milestones such as:
- A child’s education or marriage
- Parental healthcare
- Retirement fund for your spouse, and so on.
Formula = Annual income x 20 + pending loan/EMI amounts + any other financial liabilities + future life goals = First value
4. Add up all your ancillary wealth
Use the formula above and add it all up. Once you get a rough value, account for any liquid assets, investment returns, savings, real-estate income, or any extra earnings and minus that with the first value arrived above.
Formula = Annual income x20 + pending loan/EMI amounts + any other financial liabilities + future life goals - ancillary wealth = Life cover amount.
Get a term plan with Tata AIA’s Term Insurance Plans:
Getting Tata AIA term life insurance plans serves two purposes:
- You get a diverse range of term insurance plans to choose from
- You receive your money’s worth.
We offer term plan coverage for every palette (with complete transparency and no hidden loopholes in the Tata AIA Policy details). Compare our term insurance plans and offerings and choose from:
- Long-term coverage (up to 100 years of age)
- Flexible premium payment frequencies
- Additional ridersfor extra protection
- Choice of death benefit payout options
- Return of the premiums paid
- 50% of the sum assured on the diagnosis of a critical illness
- The option to enhance your cover amount at different life stages
Getting the right amount of life insurance cover depends on your requirements. With a proper analysis of your needs, you can move on to compare term insurance plans or life insurance plans and select the one appropriate for you.