What is the ideal amount to invest in an insurance policy? Should we focus on the life cover amount or number of policies?
It is best not to invest in more than one policy if it is for a single individual. You must, however ensure that you are adequately covered. Here are a few common and popular techniques to figure out your Life Insurance requirements.
Income Multiplier Technique
If you fear mathematics and long calculations, this is the most rudimentary of all techniques. It states that you should have a coverage that is 10 to 12 times your annual income. So, if your annual income is Rs. 10 lakhs today, your coverage should be Rs.1 crore to Rs. 1.2 crores. If you’re a 30-year-old salaried male with no tobacco habit, earning Rs. 10 lakhs annually, you can avail a cover of Rs. 1 crore for 20 years with monthly premiums starting from Rs. 552.
Underwriters’ Thumb Rule Technique
This is a similar technique to the above where a multiple of your annual income is considered as the optimal cover. The difference here is that the income multiplier depends on the age of the individual. At lower ages, the multiplier is high, spelling the need for higher coverage. However, at higher ages, the factor reduces as the requirement of coverage also reduces.
Income Replacement Method
This method aims to replace your expected income with the policy proceeds in case of premature death. The method takes into account your present age, your expected working tenure and the annual income. It excludes inflation, any increase in income, and voluntary retirement sought before the expected retirement age.
Human Life Value Method
A popular method, the Human Life Value (HLV) method also follows the above principle albeit with a difference. Instead of replacing the expected income, it aims to create a corpus which, when invested, would yield the current level of income every year for the family. Suppose your annual income is Rs. 5 lakhs. You should create a corpus which, when invested in a no-risk investment instrument, yields a return of Rs. 5 lakhs annually to enable your family to replicate your contribution to your family. Assuming the rate of return to be 8%, the corpus should be approximately Rs. 62.5 lakhs. You should add to this your existing liabilities and deduct any existing assets to arrive at the ideal sum assured.
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