As a breadwinner of the family, you may want to secure the financial future of your dependent family members in your absence. And to accomplish this goal, you may buy a term life insurance policy. If something happens to you, the insurer will pay the death benefit to the family so they can take care of their everyday needs and be financially independent.
While it is easy to buy term insurance online, the critical thing to decide is the right coverage amount, i.e., how much the sum assured of the policy should be. Today, many people consider buying a term insurance plan with a sum assured of Rs. 1 crore. Although an eight-figure number may seem enough, you must ask if that is enough for you and your family’s needs.
So, how do you decide what is the right life insurance cover? Generally, insurance experts
recommend the thumb rule. The life insurance cover must be ten times the annual income.
However, you must know that the thumb rule may not always work. You must decide the
right coverage amount based on your specific financial condition.
Let us understand how to choose the right coverage amount with an example:
Let us assume Rahul Singh is a 35-year-old working professional living with his parents, wife, and two children aged three and seven. Rahul’s monthly family expenses are around Rs. 60,000, and he pays Rs. 30,000 EMI for his home loan of Rs. 70 lakhs.
Here is how Rahul should calculate his life insurance coverage amount.
His monthly expense is Rs. 60,000, which amounts to 7.2 lakhs annually. As per the thumb rule, if Rahul chooses to buy life insurance with coverage 10-15 times his annual expenses, his future household expenses would be about Rs. 1.08 crores (considering inflation), so his life insurance coverage must cover the family expenses. Besides, he has an outstanding home loan of Rs. 70 lakhs.
His two young children would need education expenses, which let us assume would amount to Rs. 20 lakhs. He must put aside a retirement corpus to take care of his and his spouse’s needs during old age. Let us assume he needs a retirement corpus of Rs. 80 lakhs.
Considering all these expenses, Rahul would need a term insurance cover of more than Rs. 2 crores.
Thus, often, depending on your personal financial condition, you may need life insurance
coverage of more than 10x the annual income. So, while choosing the right coverage
amount, assess all your future expenses, income, and liabilities, and select a cover that
would help your family repay the loans (if any) and yet have sufficient money to take care of their everyday and long-term expenses like child’s education, marriage, healthcare, etc.
(ThePrint ValueAd Initiative content is a paid-for, sponsored article. Journalists of ThePrint are not involved in reporting or writing it.)