Scouting for a life insurance policy? You must be sure of your need for taking life insurance before you can decide about how much and where to take a policy from. Life insurance is a must for anyone with dependents and fixed obligations. Financial investment planning can protect you from future financial difficulties and also secure your family in the event of any untoward incident. But the task of arriving at an optimum amount of insurance policy is quite difficult and confuses the best of minds.
Practically, your life insurance requirements change every few years as you take on more responsibilities and your family grows. For an unmarried young man with his father still working, there is not much need for life insurance. But as one gets married, has kids and with dependent parents, the need for an insurance policy increases. Every insured person needs to review his insurance coverage periodically to match it with his increasing/decreasing needs. Factors like age, marital status, earning power of all employed in the family etc. have to be considered for arriving at your life insurance needs. Your financial investment planning should neither be in excess of your requirements nor less than what you must have. By under-insuring, your family may have to bear everyday financial hardships in the event of an untoward incident like death or disability of the insured. Similarly with excess insurance you could end up wasting a lot of hard earned money that could have been utilized for other household needs.
There are various methods available to help calculate your insurance requirements. Depending on your earnings potential and your ability to folk out regular premiums from your salary, the insurance plan should be able to:
• Provide minimum income protection to your family to uphold their present level of living standards. The basic requirements for food, clothing, shelter and education should be easily met with at current standard of living.
• Once you ensure that basic life needs are secure, you should plan your long term savings to meet goals and inevitable needs arising in future like child education, marriage, buying a house and vehicle etc.
• To remain independent throughout your life, you need some pension plan post retirement to maintain a respectable living standard and be able to meet the increased medical expenses. A good pension scheme taken early in life when you are young and healthy means lower premiums and regular income for old age.
• Finally, having planned and secured all immediate and future needs, you would also want your wealth to grow. Judicious financial investment planning should help you determine the long term wealth creation goals and how much you need to invest at regular intervals to achieve the same. Your life insurance India policy should be able to negate the effect of inflation and increase your wealth corpus.
The easiest and basic income based life insurance thumb rule agreed to by most financial experts says that you must insure 8 to 10 times your gross annual income for your family’s security. It will be even better if you can incorporate fixed costs like rent and fixed obligations like home loan, child education loan etc. along with minimum income ensuring insurance plan. Supposing your annual income is Rs 200,000 and your other long term fixed costs amount to another Rs 300,000. Then your optimum insurance policy should be for Rs 1,900,000 (Rs 200,000 * 8 + Rs 300,000).
Affordability of premium payment is another important factor to be kept in mind while planning insurance coverage. Going overboard with huge premium payouts for a large insurance policy can muddle up your daily finances. Plan to set aside a reasonable 6% to 8% of your disposable income for regular insurance premium payments to ensure that you do not face cash flow problems now. By planning the premium as a certain percentage of your income, you can scout for the maximum and best insurance cover available in the market at that rate.
Besides these general methods of life insurance calculation, you can also opt for well planned and comprehensive insurance calculation techniques like:
1) Total dependents’ needs calculation will incorporate all the current cash needs the your family after the insured’s death as well as the ongoing financial needs to main a certain lifestyle.
2) Sufficient insurance to replace the loss of regular income in case of premature/ sudden death or disability of the insured is also a good way of securing your family. This approach calculates the future expected earnings of the insured during his entire life time including promotions and the cost of inflation.
3) For people with big loans and mortgages, the asset preservation approach of calculating insurance cover is best. This ensures that the taxes and debt arising due to death of insured are easily taken care of while preserving the estate and assets at the current value.