We cannot deny that life insurance is very important. Being under insured or uninsured and then dying would be tragic for family members dependent on you. One of the most important questions is how much life insurance is needed.
There are many types of life insurance products — term plan, Ulips, money back plans and endowment plans. Tax saving insurance instruments are very popular. Usually, people take insurance for Rs 25 lakh, Rs 50 lakh or Rs 1 crore. However, picking a random figure is not the right way to buy life insurance.
Also read: Are you ready to retire? 4 simple steps to check your retirement readiness
Look at dependents
How much life insurance is needed depends on a person’s age, how many people are dependent on him/her, how much responsibilities and liabilities he/she has, etc. Suppose a person is aged 18-24 years. He would be unmarried and there wouldn’t be any financial liabilities or responsibility. The financial liability would be student loans and in future, his/her parents becoming financially dependent. In this scenario, one would buy a small insurance plan. If the person has a good income, he/she should opt for a larger cover as his/her liabilities will increase when he/she gets married and additional responsibilities would be on his/her shoulders.
If the person is aged 24-33, he/she would be married and there is a need to protect the spouse’s interest. Parents would also be starting to get dependent. If the person has not bought life insurance, he/she should not delay any longer. If there is a car or home loan, that should also be taken into account. A term plan with 11-14 times of annual income and outstanding debt should be ideal.
Plan at various stages
If a person is between 34-50 years of age, he/she would probably be married and have children. This is the time when it is really necessary to protect his/her financial future. The ideal insurance would be such that it could cover the family’s outstanding loans, its day-to-day expense for the next 15 years, and children’s education cost. Generally, life insurance taken earlier would be inadequate so one should top up the existing life cover or take additional life insurance policy.
For those aged 50-60 years, children would be financially independent. The only concern would be fulfilling the regular expense of your spouse in case of your death. Your existing life cover should be sufficient and you should ensure that any future medical expense is taken care of along with any existing loan.
People above 60 years would not have to worry about their children as they would be financially independent. The priority would be to cover the expenses of their spouse for remaining years. So here we can see that the amount of life insurance varies across different stages of one’s life.
In a nutshell, your insurance should cover all outstanding loans; provide money to your spouse for the rest of his/her life and enough money to cover your child’s education and marriage. To calculate the amount, you should estimate the annual family expense. Also add your outstanding loans. Multiply the amount with the number of years you wish to support your family.
Your life insurance should be big enough at any given time to take care of your present as well future needs of your dependents. Since it’s possible to purchase large life insurance coverage at a low premium using term plans, we would recommend that.
The writer is director, Tradebulls Securities