Without adequate life insurance coverage, you are risking the financial future of your loved ones in unforeseen circumstances. Life insurance pays the policy benefits to your nominees in case an unfortunate event results in your sudden absence.
The primary objective of life insurance is to ensure your family has sufficient money to sustain themselves in your absence. Although you cannot put any value on life, it is recommended to do some basic calculations to determine the ideal cover.
Here are five factors that you must take into account while calculating the sum assured (SA):
- Estimate your family’s regular expenses
Some of these include household expenses, children’s school fees, and other education expenses. While estimating these costs, do not forget to consider the increase due to inflation. Ideally, you should avail of life insurance cover that is between 10-15 times your family’s annual expenses. This will ensure your loved ones can maintain their current lifestyle if you are not there to look after them.
- Assess future financial goals
Some of your aspirations include children’s education and their wedding. Although you may have ongoing investments to meet these objectives, an untoward incident can put a halt to them. Therefore, it is advisable to include this amount in the SA of your life insurance policy. This will ensure that your children do not have to compromise on their dreams due to a lack of funds.
- Include retirement corpus for your spouse
This is important, especially if you are the only earning member in your family. It is important to make sure that your spouse remains financially independent during her senior years. While calculating the SA on your life insurance policy, include the estimated corpus that would be needed for this purpose.
- Consider your liabilities
You may have home, personal, and vehicle loans. You do not want to leave your family with a large outstanding debt obligation. Adding the total payable value of these dues to the SA will ensure that your family can repay the money in your absence without any financial distress.
- Take your existing assets and investments into account
In all likelihood, you will have various investments to meet your financial goals. You may also have certain assets your family can liquidate in the case of an unfavorable event. You can deduct the value of liquid assets from the above factors to ascertain a suitable SA.
Calculating the right life insurance coverage is only one aspect of your decision. This amount is not static. So, it is essential to regularly evaluate your cover during different phases of life. You can also include various types of life insurance policies to maximize the coverage.
Here, we depict the approximate coverage you require at different life stages:
| Life stage | SA |
| Age: 25, Single and employed | INR 20 lakh |
| Age: 30, married without children | Enhance to INR 30 lakh (via a top-up plan) |
| Age: 35, married with children | INR 80 lakh |
| Age: 45 – 50, older children | Continue with the existing SA |
| Age: 60, post-retirement | No cover required if your spouse is not financially dependent on you |
You can choose various plans, such as whole life insurance, term insurance, endowment policies, and money-back policies, among others. Evaluate these different options by analyzing their inclusions and exclusions, premiums, and other terms and conditions to make an informed decision. Understanding the pros and cons of these policies will help you make the right choice.
Determining the right SA is necessary to safeguard your family’s economic stability during your untimely absence. If you are still unsure, you can use an online SA calculator to finalize the accurate cover for your term insurance or whole life insurancepolicy.
