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How Much Of Insurance Cover Do You Need?
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There is data, which shows that people – especially in India – have inadequate insurance cover.
One of the reasons for this is of course, the low per capita income in the country and most of the people take a cover between Rs one lakh to five lakhs. But is this enough – considering inflation, rising costs of living and the consistent depreciation in the rupee in the future?
What may seem adequate now, will not be so several years ahead. A life insurance cover is supposed to provide the dependents of the insured (the person who is covered by the policy) with enough monetary resources to enable them to be financially secure.
The reality is however that policy covers are barely adequate for the needs of the surviving family members, especially if the insured was the sole earning member. Even when the insured is alive at the time of maturity of the policy (by which time the insured would have usually retired) the cover is too little to be of any practical use.
How do you then determine how much of insurance cover you need? You have to factor in your earning capacity and that of your spouse, the number of dependents, your family’s expenses, your lifestyle and so on.
Here are the steps that you need to take to find out how much life cover you require.
Your first step is to determine how many years your family would need the replacement income in the event that you die today. Even if your spouse were working, the loss of one income would have a bearing on your financial plans. Do you want the income cover until your children are married or finish college or until your spouse leaves his or her job or even beyond that? Assume for arguments sake that it is 20 years.
Now calculate your living expenses – this means daily expenditure that is required for sustaining daily living. Determine your long-term debts – such as house mortgages to be paid off or automobile loans.
The education expenses and marriage of your children have to be factored in and since these in the future, you will have to allow for inflation and a general increase in fees. This is a bit like shooting in the dark since it is very difficult to gauge when your children are still young as to what they would like to study. As a parent however, you have to be prepared for contingencies and plan accordingly.
Add up all your expenses – both living expenses, the long-term ones and those in the future – and you can arrive at an approximate figure of what kind of income your family will need in order to sustain them. Your spouse’s income will not remain static and is likely to rise so it is possible that you may not have to replace 100 percent of your income. Going by statistics, coverage only to the extent of 75 percent of your income is required in most cases.
Always keep some leeway for a change in personal circumstances – such as the birth of another child, a possible job loss, your health and so on.
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