Figuring out the exact amount of life insurance cover is difficult. However, you can figure out a rough estimate based on your current financial status and by considering your family’s financial needs.
If you are wondering how much life insurance you need, then read this article.
If your family members are financially dependent on you, then you should buy life insurance. This is because, in case of your untimely demise, a life insurance policy can provide financial support to your family. However, one question that you will have to face is finding out the right coverage amount.
Here are a few things you need to keep in mind while deciding the cover amount.
- Avoid ‘10 Times Your Current Income’ Method
Many people will suggest you that the cover amount should be 10 times your current annual income. However, this method does not consider inflation. Therefore, if you want to figure out a sound estimate, then you should avoid this method.
This method also will not consider rising living costs and your family’s future financial needs. Thus, it will not help in finding the right estimate. Furthermore, this method doesn’t consider stay-at-home parents, making it more difficult to calculate the right coverage amount.
There is an alternative to this method. In order to provide adequate financial support, your cover amount should be 20 times your current annual income.
- Consider Your Family’s Future Expenses
While it is important to consider your current financial condition, it is also crucial to determine the expenses that you might incur in the future. One such expense is your children’s education. Therefore, when you are planning to buy life insurance, make sure you take this extra amount into consideration.
Often, policy buyers calculate a life cover amount only based on their current income and ignore future expenses. Don’t make this mistake.
- Take a Detailed Look at Your Finances
Randomly guessing a life cover amount is unwise. You should pay attention to your finances. First, you need to add up all your debts, such as a home loan. Then, you must determine the number of years your family would need support. Multiply your annual income by that number. In this calculation, you need to estimate the cost of your children’s education.
- Your Age at The Time of Policy’s Purchase
Another important factor that you need to consider is your age. This is because your financial needs will change as you get older.
For instance, people in their 50s can choose lower life coverage. The reason behind it is that by the age of 50, most individuals pay off their debts and their children are no longer financially dependant on them. However, people in their 20s or 30s need higher coverage because most of them have a lot of financial liabilities.
Selecting the Right Cover Amount
In conclusion, the purpose of life insurance is to provide your family with financial support in case of your untimely demise. Therefore, choosing the right cover amount is extremely crucial. This way, your family will be able to meet the expenses as well as maintain their standard of living.