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How much life insurance coverage do you need to protect your family?
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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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For any earning member of a family, the first priority is to ensure that even in their absence, their loved ones are financially secure in some manner. If you are the sole breadwinner in your household, or even if you are one of the two or three earning members, you will no doubt agree with this sentiment.
Even members of a family who do not contribute financially to the household will certainly want to ensure that in their absence, the family is not inconvenienced financially. So, no matter what kind of contribution you make to your family, a life insurance plan can help protect your loved ones financially in case something untoward happens to you.
How does a life insurance plan protect your family?
A life insurance plan is a contract between an insurance provider and an insured person. The insurance provider agrees to offer a life cover to the insured person for a specified period, called the policy term. In case the insured person passes away during this period, the insurer pays out a guaranteed benefit called the sum assured to the nominee specified under the plan.
So, by purchasing a life insurance policy and by assigning your spouse, kids or immediate dependents as the nominee under the plan, you can make sure that in your absence, they have a lump sum financial payout to support them. This is how a life insurance plan protects your family.
The payouts from the plan can be used to meet the day-to-day needs of the surviving members of your family, to help them achieve their life goals, or even to pay off any debts and liabilities in your name.
How much life insurance coverage do you need?
Now that you know how a life cover can benefit your family members, you need to get a better idea of the amount of coverage you need to buy. An inadequate cover may help your family for a few years, but it may not be enough to protect them entirely. So, if the death benefits are too little, they may find it difficult to meet their financial needs over the long term.
A good rule of thumb that many experts recommend is having a life cover that is 10 to 15 times your annual income. So, if you earn Rs. 12 lakhs per year, you can consider buying a life cover that ranges from Rs. 1.2 crores to Rs. 1.8 crores.
But this is quite a generic benchmark. To truly ensure that your family is protected adequately, you need to factor in the following aspects before you decide on the right amount of coverage.
One of the primary reasons you need to financially protect your family with life insurance is to ensure that they can meet their everyday needs without any trouble. So, you first need to check what their annual expenses are, and then account for inflation by using an appropriate multiple.
Let’s say that your family’s current monthly expenses come out to be Rs. 50,000. So, their annual expenses would be Rs. 6 lakhs, approximately. Over the course of the next 10-15 years, this could increase due to inflation. And in case of your demise during the policy term, you will want the life cover to protect your family for at least another 20-30 years.
So, factoring all this in, you could use a multiple of 20 times. That would bring the size of the coverage to Rs. 1.2 crores.
In your absence, any unpaid debts in your name will become the financial responsibility of your immediate legal heirs. And if they are not earning members, or if they do not have the capacity to repay the dues, it could lead to a financially stressful situation.
So, you need to make sure that your life cover is also capable of covering your active debts and liabilities. For instance, if you have an outstanding loan of Rs. 50 lakhs, your life cover should not be lower than this amount.
The payouts from your life insurance plan will also need to be used by your family to achieve any major life goals that may be due. This could include your children’s higher education, their graduation/post-graduation, or even their wedding.
When you are factoring in the cost of your children’s education or the expenses needed for their wedding, remember to include the effect of inflation too. This way, you can help your loved ones achieve their life goals without any compromise.
Conclusion
From the details given above, it is clear that the exact amount of coverage needed varies from one individual to another. So, you need to analyse the needs and goals of your family, and then purchase a life insurance plan that gives you adequate coverage to protect your loved ones. If you are having trouble finding out this number, you can always make use of an online life insurance calculator to check the right amount of coverage needed.
If you already have a life insurance policy, but find out that it does not offer sufficient coverage, you can always buy a new life insurance plan to increase the amount of financial protection for your family.
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