Tips for Calculating Insurance Coverage You Need

If you have decided to take up a Life insurance plan, it is a wise step; but what may be storming your mind is how much insurance coverage you need. Whenever you plan to apply for insurance, it is important to seek advice of Your Personal Financial Mentor because he can give you the right direction by scrutinizing the insurance policies that are suitable for your financial objectives. Major factors that affect your decision of how much insurance coverage you need are as follows:

  • What is the minimum amount of financial security you need for your family?
  • What is your present income; as this decides your capability of paying premiums?
  • Identify your potential expenses in future, i.e. if you have got children to wed or educate, their expenses should be kept in mind.
  • What is your age when you sign up for the policy? This holds great weight-age as premium rate hike as you grow old.

You have to consider all the above mentioned factors before deciding the insurance coverage amount. It is quite a tough task to estimate the correct value. What adds to the difficulty is the fact that insurance coverage needs vary from time to time. When young, without dependents, needs are low and so is the case in old age when your children are settled. Life insurance needs are high in middle age when there are many responsibilities.

There are some tips that aid you in making a broad estimate of an insurance coverage that you need.

Consider your Income

Consider your income as the base for calculating the insurance coverage amount. Generally it is advised to take up an insurance cover at least 10 to 12 times of your gross annual income.

Be mindful of your expenses

While deciding the amount you need your insurance to offer, you should be mindful of your major expenses like, any loans or debts, education or wedding expenses of your children, etc. add on these expenses while deciding the insurance coverage amount.

Capital Fund

Make a rough estimate of your family’s annual expenses and take an insurance of a sum that will return this much amount as interest per annum. For example; if your family’s major annual needs are worth $0.15 million, and capital fund returns $0.15 million of interest per annum for the amount of $1.5 million, then you can  buy an insurance worth $1.5 million.

Paying premiums

Large insurance cover means large premium amounts. Decide your premiums taking into account your income and expense ratio. After meeting your expenses, you should decide the premium amount. This is important because delay in paying premium may result in rise of premium rates.

Dependents and their needs

Take into account your family’s needs before deciding the amount of insurance. The insurance coverage it provides should be enough to fulfill the needs of the family in absence of breadwinner. The needs of a person’s family keep on changing with the passage of time; in young age when a person has no dependents to support, insurance needs are less. With time when the responsibilities of family dwell up and a person needs to feed and up bring dependents, insurance needs are more. In old age, the empty nest stage, when dependents have settled in their lives, insurance needs again decline.

You should not mistakenly consider insurance as an investment. It is a kind of protection. Financial returns are meagre and factors like inflation make the interest rate of real return negative at the time of maturity of insurance. This makes it more important to calculate the amount of insurance coverage one needs because providing adequate security of insurance for one’s family is important but at the same time one should be careful of not over investing in the name of insurance.

Categories: Insurance

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October 9, 2013 Tips for Calculating Insurance Coverage You Need