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Life insurance is vital for securing your family’s financial future in case something unfortunate happens to you. Choosing the right sum assured is, therefore, critical to providing adequate protection to your loved ones. However, with various options and add-ons in the market, settling on an appropriate number can seem complicated. This guide aims to simplify the process and help you determine the correct life cover through easy-to-follow steps.
Start by Understanding Your Family’s Present & Future Money Needs
As a first step, analyse your family’s current lifestyle and expenses. Make a list of all the monthly household expenditures, including:
- Home loan EMI or rent
- Car, personal, education or other loan EMI
- Utility bills like electricity, water, gas, etc.
- Groceries and household items
- Kids’ school or tuition fees
- Insurance premiums
This will give you a fair idea of how much your family spends to maintain its current standard of living.
Next, account for any significant future financial goals like:
- Children’s higher education
- Cost of upgrading cars or buying property
- Retirement corpus and old age expenses
- Medical treatment for elderly parents
Adding up these recurring costs and big-ticket future expenses will help clarify the total capital your family would need if you were unable to support them financially. To estimate the appropriate sum assured and premium, you can use a life insurance calculator from a reliable provider, such as ACKO India.
Factor in the Impact of Inflation
While assessing your family’s monetary needs, one aspect often overlooked is the effect of inflation on future costs. Rising prices will only increase education, healthcare, and day-to-day expenses over the next 10-20 years.
To get a realistic picture, assume an average long-term inflation rate (around 6%) and apply this annual price growth to the future goal amounts. This inflated figure will give you a more accurate idea of how much your family would need 20 or 30 years down the line, ensuring they are well-provided for.
Account for Debts, Loans & Liabilities
Next, take stock of debts and liabilities you may have taken on, such as home loans, vehicle loans, personal loans, credit card dues, business loans, etc. Your family must be able to service these debts in future years without facing financial instability, which means their repayment should be accounted for in the sum assured.
Review Income Replacement Needs
Life insurance’s main advantage is replacing your earning capacity so your family can sustain its current quality of life. So ask yourself, how many years would my family need an income stream if I were not around? This depends on your current annual earnings, other household incomes, the number of dependents, the age of your children, and when they can start earning and supporting themselves.
If you are the sole breadwinner in your 30s with young children and a non-working spouse, your family may need funds to replace your income for several years. In such a case, provide for a larger coverage amount.
Review Other Factors Impacting Ideal Coverage Amount
Along with income replacement, there are a few other aspects that impact your ideal life insurance coverage amount:
- Assets that Provide Income: If you own income-generating rental properties or businesses that will be passed on after you, factor those proceeds in when computing the amount.
- Savings & Investments: If you have sufficient equity assets, such as stocks, mutual funds, and deposits, that your family can liquidate when needed, you may opt for a lower sum assured.
- Other Insurance Coverage: Any active health or other policies that may provide additional funds should also be considered when deciding the life sum assured.
Review Your Life Insurance Needs Annually
As you progress through different life stages, your insurance needs will change based on your income, dependents, liabilities, assets and other factors discussed earlier. Hence, make it a habit to review your life coverage amount at least once yearly and amend it to ensure it matches your family’s financial needs. Increase or decrease coverage limits based on any life changes.
The Bottom Line
Following this detailed step-by-step process eliminates guesswork and helps you arrive at an ideal sum assured figure tailored specifically to safeguard your family’s future in your absence. Use these guidelines to decide on adequate and appropriate life insurance coverage.
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