What Is The Appropriate Amount Of Life Insurance Cover For Me?
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The basic purpose of a life insurance cover is to provide for the family after the insured’s death or in case the insured is unable to earn because of any reason. Hence, the cover should be adequate to maintain the current standard of living. Choosing the face value of the policy is the most critical factor to be considered in a life insurance cover.
Choosing The Right Amount Of Life Insurance Cover
Some factors which can help decide the right amount of cover for you include:
1. Purpose of insurance: The purpose of insurance is the main factor which decides the cover value. The basic aim of the life insurance cover is to provide for your family in your absence and maintain their standard of living, as well as meet expenses such as children’s marriage, education, etc. Hence, the cover amount should be sufficiently large to help your family face these liabilities in the future.
2. Income: An insurance cover will act as a substitute to your income; hence, the policy amount should be large enough to replace the income, after accounting for inflation. However, in no case should the amount be so huge that you are unable to pay the premiums of the policy. Ideally, given the high inflation and rising cost of living, you should opt for a cover which is 20-times your annual income.
3. Outstanding debts and liabilities: The life insurance cover should be sufficient to envelop all your current and future financial liabilities and debts. Your policy amount should be able to pay off all your current obligations in full, such as car loans, mortgages, credit card bills, etc. Estimate the value of your other financial assets and accordingly fix the amount while choosing the cover value.
4. Age: Your age at the time of purchasing the policy matters greatly. Different age brackets call for a minimum cover amount, such as people within 25-35 years of age need at least 18-times of their annual income plus impending liabilities covered. However, people within 25-45 years and 44-55 years of age need a cover which is 15 times and 10 times of their annual income respectively, plus their outstanding loans covered in full. It is best to buy the policy while young and choose the longest possible tenure.
Conclusion
Choosing the right amount of life insurance cover is the most critical aspect while buying a policy. Also, a timely review of the policy helps to modify the terms, if needed.
Also read- What Is A General Provident Fund And How Does It Work
