The idea behind buying term life insurance is to ensure that your dependents have enough money to fall back on in the event of your sudden demise. Death is cruel but is real too. You cannot avoid death but can surely make the necessary arrangements for your family to be financially strong. However, the most important question that many people ask is what constitutes adequate coverage? Many families rush to choose ₹1 crore as the life insurance coverage amount. But how to know what's the right coverage for you? We help you understand and evaluate through the following steps:
Step 1: Assess your dependents’ monthly expenses
Check how much money your family needs every month to sail through life smoothly. It is generally advised to provide coverage equal to 10-15 times the annual expenses. While this is entirely up to you, a multiple of 15 is recommended to account for higher inflation, rising education costs for children, and healthcare costs for your family.
Step 2: Account for your responsibilities
A mountain of debt is the most difficult situation in which one can leave their family. Check if you have any outstanding debt like loans. Either pay off your debt quickly or remember to include the loan amount in your coverage so that your family has enough to repay the loan in your absence.
Step 3: Is there enough for life’s important events?
You have children whose education and marriage you must pay for. While you may be investing in high-rated mutual funds to save enough for the big day, your sudden demise can put a stop to most of your investments. Calculate the future value of your child’s education and marriage and decide your insurance coverage amount accordingly.
Step 4: Manage enough money for your partner’s golden years
You can neither work all your life nor expect your spouse to continue working after retirement. The best idea would be to set aside enough so that she may have a financially secure life. Calculate the estimated retirement corpus to decide the right insurance coverage amount.
Step 5: Check the value of your current investments
Along with our liabilities, we must check the value of the investments we have made. First, your family should be able to access these investments after your death. Your provident fund, fixed deposits, mutual funds, and investments in gold and real estate are examples. Assume you have a ₹50 lakh worth of mutual fund portfolio, fixed deposits and PPF. This money would be easily accessible to your family after your death, so you may deduct it from your life insurance coverage requirements.
Your age and current wealth are also important factors in determining your term insurance needs. Calculating your life insurance coverage should not be limited to assessing your investments and liabilities only. More than anything else, you should be aware of the future value of your current expenses and estimated expenses in the future.
