There is no ‘thumb rule’ in determining the amount of life insurance one needs. There are several factors that help determine the right amount of insurance that one needs. The basic fact is that if one has people depending on his/her income, he/she needs to buy enough life insurance to be able to support the dependents in his/her absence. Your life insurance should be such that it should be able to replace the income that you generate at present.
There might also be hidden income (income that you receive from your employer that is not a part of your gross salary) like a subvention of your insurance premiums, any perks and the like. You must also take these into consideration while determining the value of your life insurance. There are expenses after death – funeral costs, taxes and other administrative costs. These too should go into the list.
There are 3 basic things to avoid while calculating your life insurance needs:
- Multiplying your annual income by 7 or 8 - While this might sound like a simple formula, it fails to take into account the personal needs and obligations you have as an individual.
- “Human Life Value’ calculations – This method assumes a rate of interest to represent the increase in salary during the period between your present age earning and retirement age earnings. In doing this it misses out on the needs of your beneficiary and you may end up with a figure that is huge, possibly much more than you would need.
- Debt Coverage – Buying life insurance only to cover your debts is a bad idea. This method normally excludes any future debts you or your family might have.
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