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How Much Insurance Should You Have


If you are the only earning members in your family or somehow your family depends on you financially then it is very important for you to make sure their financial needs are met even when you are no more.

We all want our children to complete education without any financial hurdle, you are a spouse and family members should never fall short of the basic necessities of life.

Buying a decent insurance policy is one of the most preferred way to ensure this. But as we cannot predict the need for their family member’s years from now it is really confusing for people to decide the amount of insurance we need to take.

Factors that affect the amount of insurance you should take

There are several factors which determined the amount of insurance one should go for, most common of them are as follows.

1. Your Age

Your current age is one of the biggest determining factor. Usually young people do not have many people financially dependent on them does the required less amount of insurance, however it is advisable to start insurance early in life because the older you get premium charges would increase.

2. Age of your family members

It also depends a lot on the age of your children and spouse too, as you need to determine the total number of years of replacement they will require. Generally you can assume that your children will require financial support till they graduate from college and find a job.

3. Your mortgage and other debts

You need to consider any mortgage debt you have under your, like your house loan, car loan or any other loans.

4. Special Need of children

You don’t have to consider only the in general expenses but also make sure that you will fulfill any of the special need of your children like higher education or wedding expenses.

The basic idea is to have enough insurance so that they do not have to shift their lifestyle or standard of living.

3 Methods to determine the value of insurance

There are three well-known methods which can be used to determine the amount of insurance you will need.

  1. The most simple and general and advice we get from every financial planner is to build a corpus of 7 to 10 times of your annual salary. However, the situation for everyone is not same so many people go for much complex methods of calculating the insurance value, which we have mentioned below.
  2. Human life value – in this method you need to multiply your annual income by the number of years before your retirement,  however, you need to consider the rate of inflation and adjust the figure accordingly.
  3. This is one of the most straightforward methods where you simply calculate the total amount of expenses your family will require in future to decide the insurance amount.

However, you need to consider that your insurance policy is not an investment, it is just a protection for your family. So you should avoid over insurance as well as under insurance.

Right financial planners will help you  decide the relevant amount  and also guide you towards taking the right route to achieve that.

Moiz Choolawala
Moiz Choolawala
Moiz Choolawala is the founder of Plansmart and a SEBI Registered Investment Adviser. An MBA in Finance and Marketing Moiz is an experienced investment adviser and blogs about investments, personal finance, insurance planning and tax planning.

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