Life Insurance is a vital instrument that is used for the purpose of income replacement in the event of your death. But the foremost and the most basic question for every person who plans to take life insurance cover is how much life insurance cover is needed for your family in case you do not survive. Well an optimal life insurance cover is utterly needed for your family. Life is full of uncertainties and despite your best efforts you cannot guarantee yourself a desired age.
As you cannot be certain about how long you would going to live, the fundamental issue confronting you then becomes how would you protect and safeguard the interests and well being of your family. Here steps in the role of Life Insurance as it is one of the best instruments that you can use as an income replacement for your family.
But one cannot take a life insurance blindly. Here I am not talking about the type of life insurance cover, though it is also important, I am basically concerned about the amount of life insurance cover.
How Much Life Insurance Cover Do You Need
Actually this is a variable amount and varies from person to person but the parameters on which this is based are common to all the people who plan to have a life insurance cover.
It is quite obvious to understand that two persons with same salaries but with different liabilities would have different life insurance cover.
So let us understand the factors contributing in deciding the life insurance cover needed by you. A systematic approach is needed in figuring out your life insurance cover.
The very purpose of taking a life insurance cover is that you want your family to maintain the same standard of living even when you are not alive.
So as a first step in deciding the figure for life insurance cover, you ought to decide the number of years for which you want to have life insurance cover. As a simple strategy you can have the risks covered for your life atleast upto the age of 55 years.
This is the period when you have to shoulder maximum of your responsibilities. So the risk is highest in this period. For example, you have to meet various expenses related to your children education, their marriage, homeownership, parenthood, loans, debts and other expenses as well. You have to cover all of these with your life insurance cover. Generally a life insurance cover of 25 years would be adequate enough.
Secondly, you have to decide upon the type of insurance cover. This is important as you want to have maximum coverage with a least expense. A term insurance would work perfectly to fulfill your needs of life insurance cover. The advantage a term insurance gives to you is that it provides maximum coverage with the least payment.
Thirdly you have to decide the exact amount of life insurance cover. Now this would vary from person to person but according to a well accepted formula, this amount can be calculated by considering couple of factors. One is the amount of your present annual income, the other one is the inflation rate and the last one is the number of years you want the life cover.
So if your annual earnings are $10000, inflation rate is 10% per annum and period of insurance is 20 years, then you should atleast take insurance cover of $200000. You should remember that this figure is a minimum one and is also not constant throughout the period of insurance. Meaning that you might have to add to this figure as and when your earnings increase, your responsibilities and liabilities change and also according to the change in the inflation rate.
So this is how you can arrive at the figure of How Much Life Insurance Cover Do You Need? Having said this it is not mandatory to have the required insurance cover at one go. You should first analyze your present financial situation and can gradually increase the life insurance cover. The amount you keep aside for your insurance cover should never hamper your day to day expenses.
So you can decide upon the amount of life insurance cover based on your present financial commitments and family responsibilities. But you ought to have life insurance cover in place so that your family is protected always and assured of a safe and sound future.
Thus we see that Life Insurance Cover need is actually dependent on your desire to provide your family a decent standard of living even after your death. So ultimately the financial security and well being of your family is in your hands. If you want to give your family financial protection even after 10 years of your death you must have life cover for that much amount which your family need in next 10 years. If you want your family to maintain the same standard of living then taking life insurance becomes utmost important.
By the forgoing discussion now you very well know How Much Life Insurance Cover Do You Need? So be assured of your great future but also have an adequate life insurance cover to protect the interests and well being of your family.