Investing in life insurance policy for the future is a very essentially aspect of personal financial planning. However, an important consideration after having decided to go for insurance cover is determining the amount of insurance cover needed – for self and family

In this regard, it is very essential to do the correct math, as future cannot be predicted, nor can all the likely expenses. For rising inflation can increase cost of living and what a Rs.100 can buy today will cost five-seven times more.

Besides one has to take into account large expenses like children’s higher education and marriage and of course, the retirement needs of the partner.

There are many questions to be answered before buying a life insurance.

 Some of the key points will help in answering these questions.

 Deciding the total sum insured

Normally the value of sum insured depends on two factors – one, based on your age and annual income – it could be between 10-15 times your annual income.

So, if you are below or around 40 years, cover is approximately 15 times the annual income and if around 50 years then 10 times of annual income.

Secondly, your family’s annual expenses can also help calculate the right sum insured for your policy.

Normally it must be at least 12 – 15 times of your family’s annual expenses. Remember the sum insured varies from person to person. Your current income and ability to pay insurance premiums also count as much.

 Protecting your spouse

Choose a plan that adequately covers your spouse’s future is absolutely important- to protect your partner’s old age requirements so that he/she can live a life of dignity and comfort in your absence.

Things to take into account here are living expenses, medical expenses and so on.

 Factoring inflation

 Always factor for inflation when calculating your family’s future costs and expenses.

They are always increasing. What is Rs. 40,000 today will double in 5-6 years.

Always review your insurance cover in every five years and increase the cover depending upon critical milestones in life, such as marriage, buying a new home, birth of child and so on. Most insurers would allow change in life cover.

Current and future loans and liabilities

In today’s time, your liabilities and loan repayments are probably one’s biggest single current outgoing. And if you’re the main earner in your family, an unpaid loan is something you don’t want your loved ones to repay in the event of your death.

Hence, when working out how much cover you need, check that you have sufficient cover against both capital and interest repayments.

Children’s expenses

Expenses both current and those that are likely to arise in future related to your children ought to be considered. These include education including school and higher education.

You may want the peace of mind that your children will be able to continue at the same school, or be able to complete their university education. Similarly, their marriage expenses also need to be factored in, and any other sudden expenses that may arise, say a major illness.

Just how much life cover is likely to be needed, and for what period of time, will of course depend on how many children you may have, and how old they are.

Income replacement

If you were no longer there as principal earner, how much money would your dependants need to continue their current lifestyle?

This is the most difficult calculation of all, of course, since it involves taking your current salary into account, and attempting to predict the family’s future needs.

Critical illness

One may need to also consider critical illness cover. Think about how much time you may need to take off from work to recuperate from serious illness, and the potential additional financial pressures that may bring.

 The amount and level of life insurance cover one needs will depend on one’s own personal circumstances, and it’s important to have an idea of the level of cover he/she needs before buying any policy.

In case you find this exercise tough, you can take the help of a financial advisor or there are calculations available online which can give you a general idea of the amount of cover you need.

Disclaimer: All the views in the blog are personal of the author not attributing to anyone.