How much life insurance should I buy?
This is amongst the first thought that comes to an individual’s mind while thinking of Life Insurance. Your requirement for Life Insurance depends on your age, your income, your liabilities, your future goals and expenses incurred by his dependents. So it is prudent to buy life insurance that can replace your future income and cover your dependents’ current and future expenses.
To find out how much life insurance coverage you need, there are some steps that can help one make enlightened decisions:
Income
The first and foremost thing that is required to be known is your current annual income. For Salaried persons it would mean their net take home salary plus any bonus or incentives that is received every year and for persons involved in business It would mean their Net Profit.
Financial Obligation
Life insurance involves everything pertaining to your payments in the present and for the future as well. Financial obligation is an addition of expenses and debts. Your expenses could be raising kids, college tuition fees, and end of life expenses, and your debts can be any type of loan, such as home loans, vehicle loans, credit card bills etc.
Future Life Goals
Life Insurance is important if you are married and especially if you have kids. The amount of Life Insurance should be such that it covers your future life goals like buying a property, your child’s education, their marriage and any other major goal which will become due irrespective of whether you are alive or not.
Inflation
High inflation can increase the cost of your future goals and hence inflation should be taken into account while calculating your living expenses and future goals.
All above factors need to be considered to ascertain How much Life Insurance you require.
An easier method is to use a rule of thumb. The below table will assist you in choosing the correct amount if Life Insurance you require
| Age | Insurance Coverage Required |
|---|---|
| 25 – 30 years | 20 times current annual income plus outstanding liabilities |
| 30 – 40 years | 15 times current annual income plus outstanding liabilities |
| 40 – 55 years | 10 times current annual income plus outstanding liabilities |
So basically, life insurance is a financial protection for your family in case of your death. The quantum of Life Insurance should be such that in your absence your family can maintain their lifestyle and current standard of living.
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