How Much Life Insurance Coverage Do You Need?
Determine the right amount of life insurance coverage for your financial needs. Explore factors that impact coverage and premiums.
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Your guide to calculating life insurance coverage
A Life Insurance Policy is a great way to secure your loved ones' financial future after you're gone. One of the most important aspects to consider when you choose a life insurance policy is its coverage. It is an amount that your beneficiaries will receive from your death benefit. This coverage payout depends on your family members, their lifestyle, and needs. What works for the average Indian may not be ideal for you and your loved ones. Learn more about life insurance coverage, what to look for, and how to determine an appropriate amount.
What is life insurance coverage?
A life insurance coverage is paid to your beneficiaries after you pass away. One of the biggest benefits of life insurance coverage is that it provides your family with financial support, and covers daily expenses, children's education, and can even be used to pay for your funeral and burial costs in case you didn't consider it.
How do I get life insurance coverage
You need to apply for a life insurance policy to get the coverage. As part of the application process, you'll need to get a health check to screen for disorders and assess your health status. Your policy's premiums depend on your age, health status, and whether you drink or smoke. If you have pre-existing conditions, illnesses, or health conditions, your premium will be higher. You can start the process by identifying your life insurance coverage amount, and then choosing a policy with suitable sum assured, i.e. coverage amount. Next, you will need to find which insurance companies offer the policy you're looking for by asking for details like coverages and quotes. The last thing is to apply for your selected life insurance plan, take your medical exam and await results. Your insurance company will quote your premiums and how much your coverage is, and you're set.
How much does life insurance coverage cost
Life insurance coverage vary from policy to policy, but in general, they depend on criteria that includes your age, health status, job, and your lifestyle. The younger you are, the lower your premiums will be. In addition, if you're relatively healthy with few to no diseases or illnesses, your premiums will be low as well. Term Life Insurance is the most affordable type of insurance plan that covers you for a fixed number of years. You may find Term Life Insurance policies that range between 10 to 20 years or other set periods of time. Likewise, as you age, or if you become ill or get certain health conditions, your premiums will increase to cover for age and illness. Universal and Whole Life Insurance policies come under Permanent Life Insurance. These types of insurance cost more since they offer a savings or investment option in addition to death benefits and lifetime insurance coverage. To find out the best life insurance coverage for you and your loved ones, you will need to identify your requirements and research the policies available. Compare the pros and cons of policies that you're interested in to find the match for your family.
How to determine the amount of life insurance I need
How much life insurance coverage you need is based on your requirements, age, income, expenses, debts, and how many nominees you leave your death benefit for. In Term Life Insurance, you're covered for a set number of years. In a Whole Life Insurance Policy, you're covered for life and your dependents will get a substantial death benefit from your policy and any savings or investment from it. Find out how to calculate how much life insurance coverage amount you and your family might need.
Underwriter’s rule 10 times
An easy way to calculate your minimum cover is to calculate 10 times your current annual income. The amount you arrive at will safeguards you and your beneficiaries, especially in volatile markets and inflation. For example, if your annual income is Rs. 5 lakh, your life insurance coverage amount should be Rs. 50 lakhs.
Expense replacement
Identify the monthly expenses, including groceries, utilities, transportation, rent, clothing, and education. These are just examples and your expenses may be different. You should factor your unique expenses while calculating the sum assured.
Liabilities
Repaying loans becomes a challenge in case you pass away unexpectedly, this will become your loved one's responsibility to pay off. Ensure you secure your family's finances by identifying your liabilities. For example, consider your debt, unpaid credit card dues, mortgages, etc.
Human Life Value
As the primary breadwinner, you'll need to factor in how much your family will need when they don’t have access to your regular income. The Human Life Value (HLV) takes into consideration future income through death benefits or insurance savings, your family's expenses, liabilities, and investments. The calculation for HLV is as follows.
Life Insurance Coverage Amount = Your Current Annual Income x Years Left for You to Retire
What are the different types of Life Insurance Policies?
Financial experts agree that life insurance is a crucial component in a sound financial portfolio. You can secure your finances as well as your dependent’s financial future by choosing the right type of life insurance coverage for your lifestyle.
Term Life Insurance
In a Term Life Insurance plan, you get coverage for a certain number of years. In case of your untimely death, your beneficiaries will receive a death benefit. If you survive the term of your policy, the plan will become inactive and there is no death benefit.
Whole Life Insurance
You're insured for life when you buy a Whole Life Insurance Policy. If you pay your premiums in time, your beneficiaries will get the entire value of your policy through the death benefit after you pass away.
Child Plan
You can set up a Child Life Insurance plan that helps you generate a corpus for your children over a number of years. It pays a lump sum amount that your child can benefit from, whether it's for higher education, marrying their partner, or buying a home!
Unit Linked Insurance Policies (ULIP)
A ULIP insures you and offers an investment option where you can choose how and when you pay for your premiums. Your ULIP amounts are linked to the financial market. If the market is strong, you'll get a substantial return on investment, but if it's low, you'll face losses.
Money Back Plan
In a Money Back Life Insurance policy, you and your dependents get regular payouts called survival benefits. In addition, your beneficiaries receive a payout in case of your untimely death.
Endowment Plan
In this life insurance policy, your beneficiaries receive a lump sum when the term of your life insurance expires, or when you pass away. In general, your policy would "mature" after 10, 15, or 20 years.
Annuity Plan
In an Annuity Plan, you pay regular payments or one lump sum that allows you to enjoy the benefits when you retire - or at a later date. These payouts can go to you, or your beneficiaries. This plan offers insurance and investment benefits.
Tips to choose life insurance coverage
Ensure you choose the right kind of policy and relevant life insurance coverage for your family when you're not around. The following are a few tips to consider when selecting life insurance coverage.
Identify your finances
Make a list of your financial obligations by including your future expenses, outstanding amounts such as debts and mortgages, your children's education, etc.
Income replacement
The life insurance coverage you choose must replace your income for your loved ones. Ideally, you will need to consider their expenses and education costs until they are 18 or can start earning on their own.
Evaluate assets
In addition to hour life insurance coverage, you may have assets that can be utilised to cover expenses. These assets may include savings, provident funds, investments, properties, gold, and retirement accounts.
Health and age
Health is wealth when it comes to life insurance coverage. Being young and healthy impacts your life insurance positively. Factor in your age and health status when you choose the sum assured of your policy.
Get advice from the experts
If you are unsure about choosing the right coverage, you can consult with a financial expert who can identify your needs and give you sound insurance advice.
Frequently asked questions on Life Insurance coverage amount
Here are commonly asked Faq's on life insurance coverage amount
What is the cover amount in life insurance?
A cover amount, also known as sum assured or death benefit, is the amount of money that your insurance company will give your beneficiaries after you pass away. You would have chosen this amount when you bought the policy. Your cover amount can be fixed, or you can calculate it with your current income, age, and health.
How to calculate cover in life insurance?
You can calculate your life insurance coverage amount by factoring in criteria such as your family's current expenses, education costs, outstanding amounts such as debt or mortgage, and projected expenses.
What is the maximum cover policy?
In a maximum cover life insurance policy, you will get full coverage for a certain period of time, or for the entirety of your life. The maximum cover life insurance policy gives your beneficiaries a lump sum when you die. Premiums in this policy are higher, and fixed for the duration of the policy and remain unchanged by inflation or interest rates. With these benefits, however, there are also some restrictions such as a waiting period.
Disclaimer-The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.