What is the right amount of Insurance?
'How much Insurance Cover is enough for my family and what policy term should I go for?' are questions that one often ponders while selecting an optimum insurance plan. Before we try to come up with the magic number of what amount and what policy term one should aim for, let's first understand the various factors and variables one should weigh-in to make the insurance cover sufficient.
One comes empty handed to this world, and one will leave empty handed. However, what you can leave behind for your dependents is a sense of security and financial freedom in your absence. Your policy cover should be enough to cover the monthly expenses of your family, account for unforeseen emergencies, take care of your children's higher education and their wedding expenses.
However, even after taking into account these factors, one cannot quickly arrive at a number one should aim at. Calculating the required insurance cover for your family is a logical step by step process which takes into the account the following additional factors:
- In case a family loses its bread winner, the policy should replace a greater portion of the monthly income that would have come home otherwise.
- How much does your family need a month to live comfortably? This is largely based on the number of dependents at home.
- How much time is required, till your eldest child can start earning? The younger your kids higher the policy cover would be required, since you need to sustain them those many years longer till they are independent.
Other points that need to be considered are how risk prone your lifestyle is, like do you indulge in adventure sports, are you a chain-smoker or drink regularly etc. All these factors increase the insurance cover required since you have a lower probability of living a long life. Also, if you already have assets to your name, then the asset value can be used to bring down the required insurance cover.
Having an insufficient cover is as good as no insurance at all. At the same time, spending all of your monthly savings on a cover that is too much for your dependents is also not good. A perfect balance is required to leave behind a 'I care about you' legacy for your loved ones.