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How to Evaluate Your Required Life Cover Amount

A life insurance plan is one of the most popular financial tools to provide your family with the much-needed financial assistance

Wednesday November 25, 2020 11:28 PM, ummid.com News Network

How to evaluate Life Cover Amount

The uncertainties of life have made people realize the importance of investing in life insurance. If you are looking forward to buying life insurance, you should consider the two most essential factors, which include the sum assured and the premium.

The sum assured is the amount your nominee will receive in case of an unfortunate incident. Therefore, your sum assured should be adequate to meet your family’s expenses and needs. The sum assured and the premium are interlinked with one another. It is because the higher the sum assured, the more will be the premium.

Before we speak about the factors that can help you evaluate the life cover amount, it is necessary to understand what is life insurance. A life insurance plan is one of the most popular financial tools to provide your family with the much-needed financial assistance after you are no longer around.

How to Finalize the Life Cover Value

In order to understand what would be the appropriate sum assured, you need to:

• Ascertain your needs

Identifying your monetary requirements is an essential aspect to take into account while buying a life insurance policy. Such a plan is an ideal investment avenue to secure your family's financial future during your absence. Are you the sole bread-winner for your family? How many family members are dependent on your income? Is there any other mode of income that can help your family meet the expenses and long-term objectives? These are some of the questions that you should ask yourself to fix your life cover amount.

Additionally, calculate the day-to-day household expenses like utility bills, grocery bills, and medical costs. Also, assess all your outstanding debts, like personal loan, car loan, and home loan to understand your family's financial requirements if the source of income stops in case something tragic happens with you. Besides this, consider all the long-term life goals of your family. For example, if you have children, analyze their cost of education and wedding while deciding the sum assured. These costs will be over and above the daily household expenditure.

• Identify your liabilities

The sole purpose of buying a life insurance policy is to protect your family's economic well-being in the future. Your ongoing debts can become a significant burden on your family, and if you do not have the right financial plan in place, your assets can be dissolved to pay the outstanding dues. If you do not want your loved ones to face financial challenges when you are not there to look after them, consider your pending monetary obligations while determining the sum assured. Your sum assured should be adequate to help your family members clear all your liabilities if an untoward incident occurs.

• Keep all sources of income in mind

The sole purpose of life insurance is to replace your income once you are no longer around. Therefore, while ascertaining the sum assured, it is advisable to follow the thumb rule, wherein this value should be a minimum of ten times your yearly salary. Besides this, it is recommended to review your earnings from all sources like rent, income from fixed deposits, and other investments. Doing this can help you determine how much money your family will need to be financially self-reliant during your absence.

Apart from providing financial stability to your family, another important benefit of life insurance is that it helps to save on taxes. Many people invest in such plans only to reduce their tax liability. However, they should realize the importance of safeguarding the family's economic future. So, buy a life insurance plan with an adequate sum assured and heave a sigh of relief by protecting your family against the uncertainties of life.

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