How much ever an individual earns, buying life insurance becomes critical. Individuals with dependents or high debts must consider investing in a life insurance policy to financially secure their families. Life insurance holds a significant part in the financial planning of an individual. It provides support to the dependents of the insured to meet financial liabilities in case of their absence.
However, proper research before buying any insurance plan is a must. The ideal policy should meet the financial capacity of an individual, and at the same time, provide adequate life cover. The life insurance premium calculator online helps to ascertain the amount of premium that is affordable as well as provides the required cover.
Every life insurance has various in-built features. So, how to choose a life insurance plan according to one’s income? The first thing is to calculate the sum assured required. The simplest way of computing this is by determining the daily expenses, outstanding financial liabilities (loan/debt), and future inevitable heavy expenses like children’s education, wedding, etc.
After calculating the sum assured, the following factors are considered:
Current Expenditure
Buying a life insurance plan can become expensive. Though, before investing in a life insurance plan, one needs to make sure that the family’s standard of living is not affected in any way. The simple way for an individual to do so is to add all the monthly expenses and multiply them by 12 to ascertain the annual expenditure. Additionally, certain expenses to be added are the premiums paid altogether by the family and basic monthly expenses like bills, groceries, children’s education or wedding, and miscellaneous expenses.
These minimum expenses have to be taken care of in case of the absence of the insured. After calculating all these expenses in a year, the inflation factor is also to be considered. For instance, if an individual is 40 years old, the annual expenditure is Rs 5,00,000 every year. The inflation rate remains static at 7% per year, and the expenses remain the same. Then, these expenses amount to approximately Rs 16,00,000 per year after about a decade. So, the average amount required would be Rs 10,00,000 every year. Hence, one will need a sum assured equal to Rs 10,00,000*20 (number of years to retirement), which is Rs 2 crore.
Income multiplier
Another very effective method of calculating the insurance coverage one needs is the income multiplier. In this technique, the individual’s income is multiplied by the age group factor they belong to. It helps to ascertain the minimum and maximum sum coverage one will require according to their age and income. Before using the income factor for multiplication, the individual has to deduct their expenditure from the net income. For individuals who fall in the age bracket of 20-40 years, the minimum insurance coverage is ascertained by multiplying the income by a factor of 15 and for maximum insurance coverage, income is multiplied by a factor of 20. Likewise, for individuals aged between 40-50 years, the minimum multiple is 10, the maximum is 15, and for those aged between 50-60 years, the minimum multiple is 5, and the maximum is 10.
Calculation of a life insurance policy cover is not a one-time affair that needs to be done just at the time of purchase of a policy. It should be reviewed every 5 years, depending on changes in the liabilities. It helps in evaluating whether life insurance rider plans are required to provide wholesome coverage.
Assets and Liabilities
Children’s education, weddings, and a new house are some of the sizable liabilities that individuals have to incur. To fund these expenses, many people have to take out a loan. Hence, the insured must add the loan and other debts to the liabilities. Similarly, the insured also needs to add all the assets, like income, wealth, gold, property, cars, securities, and fixed deposits. After calculating the assets and liabilities, one can compute the amount of sum assured that they might require.
Conclusion
Everyone has to buy a life insurance cover at least once in life. However, buying it early comes with many benefits that one might not get at later stages of their life. However, knowing what kind of policy will suit the individual or what should be the sum assured is crucial and needs to be understood. Hence, after keeping all the factors in mind, one should choose and buy a policy.