Life insurance is a protective shield that covers the life of an insured by managing their financial goals and responsibilities even in their absence. Though a majority of India’s population purchases life insurance policies, many may not be aware of the right coverage amount they actually need.
So, whether you purchase life insurance online or offline, you need to understand a few factors in order to make an informed decision.
What Should be the Ideal Life Insurance Coverage for an Individual?
The ideal insurance coverage may vary from one person to another depending on their unique needs, budget, and several other factors. Therefore, one must consider the following factors:
● Age of the Policyholder
Age determines an individual’s responsibilities and helps decide the coverage amount accordingly. A young person who has just started a career, not married, or has no children has fewer responsibilities. However, people with a family to look after have comparatively more responsibility and need high coverage.
● Assets and Liabilities of the Policyholder
One crucial factor to consider while deciding on life insurance coverage is assessing the policyholder’s liabilities. Life insurance covers policyholders’ liabilities in case of their demise. These include debt, credit card bills, EMIs, outstanding bills, etc.
Thus, the coverage amount should be enough to cover these expenses without straining the family’s budget. Besides, the insured’s assets should also be assessed to ensure they are enough to meet their financial goals after repaying the liabilities.
● Current Earnings of the Insured
As per financial experts, life insurance should provide coverage that is approximately 15 to 20 times your yearly income. For instance, if your annual income is ₹6 Lakhs, your life insurance policy should offer coverage of ₹90 Lakhs to ₹1.2 Crores.
Life insurance coverage is meant to replace the policyholder’s income in their absence. So, you need to choose the coverage accordingly while buying life insurance online.
● Financial Goals of the Insured
Financial goals are another crucial factor determining an individual’s life insurance coverage. Such policies aim to meet policyholders’ financial goals in their absence without compromising their family’s living standards.
Thus, one should consider their financial objectives, like children’s higher education, purchasing a home, any upcoming expenses in the family, etc., while selecting life insurance coverage.
● Budget
Last but not least, the individual should be able to afford the monthly premium for the decided coverage amount. Higher life insurance coverage undoubtedly offers wider financial security, but it also comes at a higher price.
Policyholders should consider this factor seriously, as any default in premium payment may lead to a policy lapse or cancellation of coverage benefits.
You can calculate the right term insurance coverage by following these easy methods:
● Calculate the Human Life Value
Human Life Value, commonly known as HLV, calculates the current value of a policyholder’s expenditures, savings, projected profits, obligations, etc. It is used to determine the amount required to cover the beneficiary’s financial needs when the policyholder dies.
You can use the human life value calculator available on your preferred insurance company’s website to determine the HLV accurately.
● Rule of the Underwriter
According to this formula, the minimum coverage should be a multiple of annual income based on age. Individuals in their 20s and 30s should aim for coverage of 25 times their yearly salary, while those in their 40s and 50s should consider 10-15 times their income.
Additionally, one must consider their willingness to pay premiums year after year when determining coverage breadth.
● Replace Income Value
This method calculates life insurance needs based on the lost income of the policyholder due to their unexpected demise. The formula goes as follows:
Life Insurance Coverage = current yearly wage x number of years until retirement
It helps determine the life insurance coverage requirements based on the insured’s annual income.
● Substitute Expense
This strategy involves assessing policyholders’ daily family expenses, debts, children’s education, and support for dependent parents for the rest of their lives in case of their demise.
The total financial requirement for the family is calculated, and then the current value of investments and existing life insurance is subtracted. It’s essential to exclude assets like homes and cars, as family members will still utilise them.
These methods provide structured approaches to estimate life insurance needs, ensuring that families are financially protected in case of unforeseen events. Each method has its strengths and can be tailored to individual circumstances and financial goals.
Thus, individuals planning to buy life insurance online must consider the factors discussed and calculate methods before getting maximum coverage. This will give them peace of mind, knowing that their life insurance policy will provide adequate cover to cater to the needs of their loved ones.
