HOW MUCH LIFE COVER IS ENOUGH?

As your expenses and liabilities grow, so does the need for adequate life insurance to secure your family’s future

Life insurance is an integral part of financial planning that helps your family meet its goals after your death. The critical decision, though, is the amount of insurance cover one should have. “Calculating insurance cover should not be based only on how much premium you can afford but how much is needed to protect your family’s lifestyle when you are not around,” says Amar Pandit, founder of happynessfactory.in, a financial advisory firm. According to Manik Nangia, director and CEO, Max Life Insurance, “One way to calculate the adequacy of life cover is to assess the amount your dependants would need in the future to maintain their current standard of living and take care of future expenses.”

Here are some of life’s milestones when you need to review your goals and adjust your life cover:

First job: Young professionals living with working parents may not need life insurance cover immediately. But if your parents are expecting financial support in the future, buy life insurance to secure them. Also, term insurance plans are cheaper at a younger age. Marriage: It brings with it huge financial responsibilities and the need to plan for a comfortable retirement in the absence of one partner. If both partners are working, it makes sense for each of them to have a life cover according to the proportion of their contribution to the family income.

Children: Factor in the expenses of your child’s growing up years, education and marriage and increase your life cover accordingly. Experts suggest increasing the cover by at least five times your annual income. Rise in income: An increase in income over the years invariably leads to higher lifestyle expenses. An insurance cover taken in, say, your 20s will be out of sync with your expenses a decade later.

There is another thumb rule to figure out your life cover. “Life cover should be 15-20 times your annual income before 40 and 1015 times after that,” says Suresh Sadagopan, founder, Ladder7 Financial Advisories. This rule works best in nuclear families. However, if you have obligations, such as loans, or more dependants, your cover needs to go up correspondingly. Ideally, one should review life cover at an interval of five years.

Remember, however, that term plans do not provide the option of increasing life cover midway, so you may have to buy a new plan each time you wish to increase your cover. On the flip side, you can also reduce your life cover as and when you are done with major financial obligations in your life. “It is not necessary that you always add a new plan. Simply increasing the cover or junking some unnecessary covers can help build a sound financial future,” says Anjali Malhotra, chief customer, marketing and digital officer, Aviva Life Insurance.