Do you wish to buy life insurance online? You are not alone; most Indians have realized the value of life insurance in the aftermath of the COVID-19 outbreak. The coronavirus pandemic has spurred a demand for financial protection for the family. Naturally, life insurance has gained massively, with people looking to beef up their portfolios with this core product. Yet, one dilemma still exists in the minds of several potential customers while planning their investment portfolios. How much coverage is suitable for life insurance? What is the quantum of insurance that one requires?

 

It is crucial to get into the nitty-gritty of calculating personalized life coverage. You can either use online life insurance calculators or take advice from agents. Some use a rule of thumb that states that the annual income has to be multiplied by 10, 15, or 20 to arrive at the suitable coverage amount. Is this the best method? Here is a closer look at the life insurance coverage you should allocate for your investment portfolio.

 

Life Insurance- How much is too much (or less)?

Life insurance is the primary component to include in any portfolio. First, however, you must think about the coverage that you need. You may have multiple life insurance policies without being adequately insured. Alternatively, you may be over-insured too. Sometimes, you may have too little coverage, and it can affect your family negatively in the future.

 

Deciding on the right amount of coverage for your portfolio, keeping your other investment goals in mind, is not always easy. Low life coverage may put a family under financial strain in case of the policyholder’s demise in the future. Yet, getting high coverage also entails paying sizably higher premium amounts. In addition, it may eat into lifestyle costs, other investments, and discretionary spending. So how do you find what is right for you? Here are some pointers worth noting in this regard:

 

  • The sum assured should be adequate to ensure a regular flow of income for the dependents, enabling them to maintain the same lifestyle. Inflation is also a factor to consider here. If there are liabilities, then the calculation should include them too. It may also have money for meeting specific family goals like the higher education of children, weddings, and so on.
  • Some experts feel that the priority should be risk coverage for those with dependents before coming to savings. Analyze your life stage, dependents, risk profile, liabilities, disposable income, and other factors to identify your future requirements. The protection should not just cover future liabilities but also the future income potential of the policyholder.
  • The amount for maintaining living standards can take projected future monthly expenditure (after accounting for inflation) as a foundation. It is the minimum amount that the family needs for the future. The real need is usually 120% of the current amount to cover health-linked costs and inflation.
  • The HLV (Human Life Value) method also helps with the calculation. The amount of insurance to be bought in this system depends on the economic value or what the person will earn over an entire professional journey. The aim is to forecast future income and use a discounting factor, accounting for bank rates and inflation. The current value of the future earnings will be the economic surplus available for all family members without including taxes, existing life insurance premiums, or costs of self-maintenance of the individual. Suppose someone earning Rs. 20,000 each month has personal costs of Rs. 5,000. Then the family will get Rs. 15,000 each month. It comes to Rs. 1,80,000 annually. Now the amount that will generate this figure at a low-risk interest rate is the HLV.
  • Underwriters have a thumb rule where the coverage is a multiple of the policyholder’s yearly income, based on age. Those between 20-30 should choose coverage amounts of 15 times the annual income, and it goes up to 14 times for those between 31-40. People between 41-45 should choose 12 times their annual income as their life coverage, while it is ten times for those in the 46-50 age bracket. People between 51-55 and 56 onwards should choose 8 and 6 times their annual income as their life coverage, respectively.

 

Once you calculate the ideal life coverage for your needs, you should calculate the premium payable for the same and how it fits into your monthly budget. Note that it should not compromise other aspects of your investment portfolio like saving for retirement, accumulating future wealth, maintaining wealth, and investing for short and long-term goals. In that sense, you can have at least 10% of your monthly income for future protection. This category includes both life and health insurance. At the same time, you may opt for endowment or ULIP policies. They offer both investment and insurance. Hence, the ratio may differ in this case.

 

Chalk out a personalized portfolio allocation strategy depending on your future goals, risk appetite, financial status, income, and other considerations. However, do not skimp on insurance coverage if you can help (and afford) it!

 

 

By Anita Gale

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