Individual or sole breadwinners of a family are typically obligated to invest in comprehensive life insurance policies, as they have the whole family depending on them to meet their financial requirements. However, owing to certain factors, people often tend to purchase bigger life covers at the cost of other lifestage expenditures, which result in a higher outgo of premiums.
There are multiple factors that play an active role in determining how much life cover one must purchase.
First and foremost, let us look at all the factors that actively regulate the cost of a basic life insurance policy:
An individual’s age:
Life insurance policy premiums become higher as a person gets older.
An individual’s gender:
Most insurance providers in India believe that women tend to outlive men, and hence run a lower risk of making a claim. Therefore, in most cases women pay relatively less premiums as compared to men in the same category.
An individual’s health profile:
Lifestyle habits such as drinking and smoking not only increase the mortality rate and lead to life-threatening terminal illnesses, but also increase the premium rates of life insurance policies substantially.
An individual’s occupation:
White-collar jobs are considered to be relatively safer as compared to blue-collar jobs, and hence, workers from the former category pay lesser premiums for life insurance policies as compared to the latter. Moreover, certain occupations such as adventure sports instructor, fisherman, etc., are considered to be potentially life-threatening by insurance providers, which thereby increases their premiums.
As the size of one’s family grows, so do responsibilities as well as the need to purchase a life insurance policy with a higher cover. In order to determine the expenditure that a family will incur in the near future, a periodical review usually proves to be efficient. In order to ensure that the cover is sufficient, one must conduct a periodical review of one’s family’s finances.
In order to set an estimation on one’s life insurance needs, one needs to be in compliance with the following rules:
The rule of income:
According to the rule of income, if an individual purchasing a life insurance policy has a current income of Rs.2 lakh, his/her life cover must be worth Rs.10 to Rs.12 lakh. This is because as one ages, one’s financial needs increase. The universal thumb rule that all policyholders and potential buyers of insurance policies must adhere to is the income rule.
The rule of income plus expenses:
According to this rule, the value of the life cover must be five times an individual's gross annual income, and it must also include the additional costs incurred in other expenses such as personal debt, car loan, and so on. An individual must purchase a life cover that is at least five times more than what he/she is earning currently.
The rule of capital funds:
According to this rule, if an individual’s financial needs are Rs.1 lakh on a yearly basis and if they do not have any additional income-producing assets, then they can choose to create a capital fund of a certain amount of money (for example, Rs.12.5 lakh) which will in turn generate Rs.1 lakh. The individual can, therefore, purchase a life insurance policy worth Rs.12.5 lakh.
The rule of premiums:
According to this rule, an insurance premium payment is directly dependent on an individual’s disposable income. In other terms, life insurance quantum must be determined only after one has met with the regular outgo of premiums. This is known as premium as percentage of income and it helps an individual calibrate the monthly cash flow by dedicating a certain percentage (of the income) to premium payments.
The rule of need-based approach:
The insured individual’s family’s immediate and ongoing financial requirements are the two important elements around which this rule operates. According to this approach, the policyholder will be required to categorise his/her family’s needs into:
- Cash needs (immediate needs after death of the insured)
- Ongoing needs (net income needs)
One also needs to bear in mind that provided one’s family is relatively wealthy, one needs to buy a life insurance policy with a moderate coverage. In a similar manner, if the family members of the insured are all earning (individually), then a life insurance policy with a low coverage will suffice.
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