Once you have identified the need to purchase an insurance policy you should know about getting some basic steps right. Many of us have no or a limited idea of the things we must consider before buying an insurance cover. Most of the times, we focus on the kind of insurance cover we need but the main point we must stress on is how much to invest in these policies. Discussed below are the points you must consider to find out how much money you should invest in insurance.
Another rule to determine how much insurance coverage you will need is by considering the monthly income your family requires in your absence. It is important for you to consider lifestyle, household expenses as well as the education expenses of your children. It is also advisable for you to include your liabilities like loans or EMIs so that they can be covered as well. Your insurance cover will also depend on the number of dependents you have in your family.
An insurance plan provides life cover for a defined period and is designed to secure the family needs in case of uncertain death of the policyholder. These are long term policies but the buyer is not required to invest a huge sum of money. The policyholder can pay a monthly or yearly premium as per their affordability and budget.
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Before you invest your money in buying insurance policy make sure the insurance cover is good enough to cover your family’s financial requirements as well as pay off the debt owned by your family. Buying an insurance policy makes sure that you secure the finances of your family in your absence. It helps your family to stay on track in case of any eventuality and helps to settle debts and loans in the event of premature death of the breadwinner of the family. These insurance plans are easy to comprehend and provide a substantial life cover within a budget. The nominee is entitled to receive the death benefit in case the policyholder expires within the duration of the policy term
Human Life Value is a term commonly used for insurance products. It is the sum of money that is paid in instalments over the individuals remaining service life; it will produce the same income the person would have earned by accumulating the principle along with the accrued interest. Many online websites allow you to use Human Life Value calculator that helps you identify your life insurance needs on the basis of your income, expenses, liabilities and investments so as to secure your family’s future.
Your insurance cover plays an important role in strengthening your family’s financial portfolio. A life insurance cover will help your family handle future uncertainties and also provide financial assistance for your day to day needs. So the question is, how to determine how much money you should invest in insurance?
Basically, your insurance cover should be enough to substitute all net future income of your family in your absence. One ideal way to determine the amount is by using the income replacement method. You can simply multiply your current annual income with the number of years remaining of your employment period to get the desired results. For instance, if you are 33 years old with an annual income of 12, 50,000 then you will require an insurance cover of 3.37 crores (12.5 lakh *27 years to retirement at 60). Therefore your life cover should be 15 times your annual income before 40 years. This method works fine for individuals who have minimum obligations.
However, if you have liabilities such as loans, specific financial goals or more dependants, your cover needs to go up correspondingly. In this case, if a 33 year old individual wants to take Rs. 10 lakh as a car loan and save another Rs. 20 lakh for the education of his child then this person must add another Rs. 30 lakh along with the existing protection cover of 3.37 crore. Individuals must avail insurance by considering other factors like ailing parents or the number of children.
According to some insurance companies, inflation is another vital factor that must be considered for determining your insurance cover. A life insurance cover of 50 lakhs may appear to be sufficient as of today, but at an inflation rate of 6%, your family will need a much larger amount to be financially stable in future.
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Last but not least, one should review life cover at an interval of five years and add to it or reduce it depending on his/her life stage and financial obligations. Keep in mind that most insurance companies offer additional optional riders along with term product. Experts say that it is better to enhance coverage by taking accidental death benefit, waiver of premium benefit and critical illness rider to make your policy more comprehensive.
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