Thumb Rules: Calculate adequate insurance required!

Calculate adequate insurance required!

Insurance is a must have product in everyone’s portfolio, if your family member or anyone depends on you financially. There are various types of policies with varied benefits and features. Which is the most beneficial policy for you? How much insurance do you need? are few question needs to be answered before buying a life insurance policy. Buying a life insurance policy is important but equally important is to buy adequate insurance.

In this article we will discuss insurance need analysis by thumb rule method which are easy & quick to calculate. Important point to remember while applying thumb rules is the calculation won’t give you exact insurance. Exact insurance depends on various factors like age, dependent needs, goals, liabilities etc. Thumb rule methods won’t give exact insurance required but with these methods we can calculate minimum insurance required.

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1.Based on yearly income

Ideally a person should be insured to the extent of 12-20 times of his yearly income. Lesser the age higher the multiple. Here Income refers to net income means income left in hand after reducing your personal expenses. This is one of the easiest way to calculate minimum insurance required. For example, a person aged 25 has yearly income of Rs.5 Lacs and spends Rs.50 on his person expenses, should be insured to the extent of Rs.90 Lacs (Rs.5 Lacs  –  50000 =Rs. 4.50 * 20 times).

2.As per your monthly expenses

Based on expense method an individual should be insured to the extent of 80 to 120 times of his family monthly expenses. The underlying assumption here is we need to plan for adequate insurance by making provision for their regular expense if we are not there.

3.Income plus expenses method

As per this method a person should be insured by following two method. The combination of income method and expenses method. In the first part insurance is calculated as per income method and in the second part expenses are calculated like housing loan, personal debt, financial goals etc. and added to first part. For e.g. as per first part income method insurance calculated is Rs.50 Lacs and second method other expenses totals to Rs. 20 Lacs. In that case total insurance needed is Rs.70 Lacs.

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4.Affordability of premium as % of your income

An individual’s has various responsibilities and priorities. Insurance premium is treated as expenses if it’s paid for pure insurance policies. An individual ideally should pay around 6% of monthly income as insurance premium for self insurance. As more members of family is insured he can increase this by 1% per person. Premium paid for savings and investment plan should not be considered, only pure insurance cost is calculated as part of the limit. Many companies follows this thumb rule while buying insurance under group insurance policy for their employees.