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How Much Life Insurance Cover Do I Need?

Here are the factors that one should consider before buying a life insurance policy & how much cover is essential. Read more to know about How much life insurance do I need?

  • Nov 10, 2021

A question that continues to be prevalent for all of us even today is - what is an insurance policy? In layman’s terms, an insurance policy is a legally binding contract between the insurance company and the primary policyholder wherein the insured has to pay regular premiums to protect their family in their absence. The insurer promises to pay a claim to the beneficiaries if the policyholder dies during the chosen term or provides a maturity benefit to the insured if they outlive the term.

Everyone aspires to have the best insurance policy that caters to their and their family’s requirements holistically. However, merely purchasing a life insurance cover is not where the quest ends. It’s imperative that you figure out how much insurance amount you need based on your objectives and requirements while also making sure it fits well within your budget.

Acquiring a life insurance policy early in life is a prudent decision to protect your loved ones and secure a bright future for them. Since these policies offer a plethora of benefits, there are no doubts about why life insurance is important.

Factors to Consider Before Determining Your Cover in India

The sum assured, or the insurance amount offered, is generally the motivating element for purchasing an insurance policy. However, before making the final choice to purchase insurance, it is absolutely critical to examine the following set of factors to choose the best insurance policy for you.

  • Age
  • Although the life insurance age limit is an important factor to consider when determining the amount of coverage you need, it is not an excuse to put off purchasing a policy. Your age and health will influence not only how much insurance you should get but also how long you should keep it. The life insurance age limit starts at the age of 18 years, so you can purchase a policy right after you begin earning.

  • Family & Lifestyle
  • If you want to protect your family’s future and lifestyle with meticulous planning, it is recommended that you choose the best insurance policy that fits your needs and rewards you with a higher cover.

  • Outstanding Debts
  • Debts such as student loans, vehicle loans, credit cards, and personal loans can all be paid off using insurance amount by your loved ones after you are gone. Therefore, if you owe any of such debts, you should buy an insurance policy that fully covers you.

  • Budget Bracket
  • If you can’t afford to pay the policy premiums, your life insurance policy will lapse. A more comprehensive life insurance cover would also demand a higher premium amount, therefore opt for a plan that fits your budget.

How to decide term insurance amount?

  • Income Substitution
  • It is expected that a life insurance policy will cover the breadwinner’s lost wages in this approach.

    Formula: Insurance coverage = current annual income x number of years till retirement

  • Value of Human Life
  • This technique takes into account a person’s financial or human life value (HLV) to the family. The worth of future income, spending, obligations, and investments is the main focus of the idea.

  • The Rule of The Underwriter
  • You can use the usual thumb rule of having a sum guaranteed that is ten times your yearly salary to figure out how much coverage you need.

  • Substitution of Expenses
  • Individuals must assess their day-to-day family costs, debts, children’s schooling, as well as the financial dependence of parents for the rest of their life using this approach. The entire amount required by your family is equivalent to the cover you need.

Having read the article, you are now aware of why life insurance is important. As a general rule, each individual differs from the next, as do their demands and insurance plans are no exception. Therefore, it is essential to consider all factors relevant to your needs and requirements before investing in a policy for the greater good.

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Ref. No. KLI/22-23/E-BB/2435


- A Consumer Education Initiative series by Kotak Life

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