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Tips to Compute Your Life Insurance Requirement

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We are pretty much aware and conscious about the fact that buying life insurance Policy is not only a need but a must. But buying just any insurance plan does not serve the purpose. Here we offer life insurance tips that will help you buy life cover policy that suffices your insurance needs.

To know which insurance policy is best for you, it is important to first compute your insurance requirement. There are two ways to look at one’s life insurance requirement – amount of life insurance and the Term of the policy.

How to Compute the Quantum of Life Insurance?

The purpose of buying life cover is to ensure that the family is able to pursue their existing quality of life in case of your unfortunate demise. So the amount of life insurance that you would need depends on your existing annual expenditure, inflation, present and future liabilities and existing savings.

Various liabilities that you should account for include purchase of new home / repayment of an existing home loan, child education, marriage and any other specific liability the family may have. The amount of funds required to meet your annual family expenses should also be included.

While estimating these numbers it is essential to incorporate the impact of Inflation that will affect the value of the various liabilities. To understand this better let us consider an example. Say if you are 33 years old and your child is expected to reach college in the next 12 years or so. If the college education expenses are about five lakhs today, these expense are certainly going to be much higher when your children would be reaching college due to the impact of inflation.

Assuming an annual inflation rate of 6 percent the amount that you should look to meet the expense on child education should not be 5 lakhs but should rather be 10 lakhs. Likewise, you should apply the same rate of inflation to other future liabilities that you anticipate and this includes your annual living expense.

If doing these calculations appear overwhelming you may rather go for the thumb rule to decide your sum assured. The rule of thumb suggests that one needs to get a sum Assured which is at least 5 to 10 times his annual income.

Choosing a Right Term for a Life Insurance Policy?

Just as it is important to choose the right sum assured, it is equally important to choose the right term of your life insurance plan. You need to ensure that the Coverage of your life insurance policy runs at least as long as you expect to continue to earn and you anticipate your family to remain dependent on your earnings.