Life Insurance can be a complex and overwhelming topic, but it is also one of the most critical components of a solid financial plan. The purpose of having a life plan in place is to provide financial protection for yourself and your loved ones, based on the types of coverage you choose. However, determining the right amount of life Insurance coverage for your specific situation can be challenging. In this article, you’ll learn everything about coverage, how to calculate the right amount, methods used and even Life Insurance riders to enhance your coverage.
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Think of Life Insurance as a safety net that protects your loved ones when they need it most. Life Insurance is a contractual agreement between the policyholder (insured) and the insurance company (insurer). In this contract, the insured makes regular premium payments. In return, the insurer promises to pay a stipulated sum, known as the death benefit, to beneficiaries if the insured passes away.
Life Insurance coverage often referred to as the sum assured is the amount the insurance company promises to pay the beneficiaries in case the policyholder dies or when the policy matures. This Life Insurance cover provides a financial cushion for the loved ones of the insured, providing them with critical support in handling bills, clearing debts, managing household expenses, and fulfilling long-term goals. The right life policy with adequate Life Insurance coverage guarantees peace of mind for both the insured and their family.
Beyond its primary function of providing a lump-sum payment to beneficiaries, Life Insurance can serve various purposes:
It ensures that loved ones or dependents are financially supported in the event of the insured’s demise. The amount received helps with daily needs, education fees, and more.
It can be used to settle outstanding debts, such as mortgages, car loans, or credit card balances, preventing financial burdens for families.
It ensures that the regular income is substituted, helping dependents meet their usual expenses until they can financially support themselves.
With respect to taxes, the premiums paid for Life Insurance policies are tax-deductible for the policyholder; meanwhile, for the beneficiaries, the amount received as a death benefit is usually tax-free.
Life insurance coverages give policyholders peace of mind. This sense of security allows individuals to focus on their daily lives and future goals without worrying about financial uncertainties.
There are different types of Life Insurance policies, such as term plans, whole life insurance plans, endowment policies, and more, each offering unique life coverage and benefits. However, Life insurance coverage can generally be categorised into two main types.
Note: Choosing the right type of policy and coverage depends on individual financial goals, family needs, and budget considerations. Click here to check your life coverage and premiums now.
In this section, we'll explain the art and science of calculating the right amount of life insurance coverage tailored to the unique nuances of Indian life.
Begin by taking a broad look at your financial world. Consider outstanding debts, monthly expenses, and future financial goals. Factor in the cost of living, education, and healthcare expenses that are integral for an Indian family.
Ideally, your life insurance coverage should replace your income and cover outstanding debts. Take into account your annual salary, considering future salary growth. If you have loans, like a home or car loan, ensure your coverage can settle these debts, preventing them from burdening your loved ones.
Include future expenses like education and marriage in your calculations. Estimate the costs and adjust your coverage to ensure financial constraints don't hinder your family's dreams.
Your health and lifestyle choices impact your life insurance needs. Consider your current health status, family medical history, and lifestyle habits. Insurance premiums can vary based on these factors, so providing accurate information is crucial for a realistic coverage estimate.
If you already have insurance policies, review them to avoid over- or under-insuring yourself. Life circumstances change, and your coverage should adapt accordingly. Regularly reassess your policies to ensure they align with your evolving needs.
The DIME method breaks down your life insurance needs into four key components: Debt, Income, Mortgage, and Education. It's like creating a personalised financial roadmap tailored to your family's dreams and aspirations. Let’s get started.
Start by calculating your outstanding debts, including loans and credit cards. Your life insurance coverage should be sufficient to settle these financial obligations, ensuring your family isn't burdened by unpaid dues.
Consider how much income your family relies on to maintain their current lifestyle. The DIME method suggests multiplying your annual income by the number of years your family needs financial support. This ensures a seamless transition without compromising on their comfort.
If you have a home loan, factor in the outstanding amount. Your life insurance coverage should be adequate to pay off the mortgage and secure the roof over your family's head. This step ensures their home stays secure, even in your absence.
Remember to factor in your children's educational costs. Estimate the cost of their higher education and factor it into your life insurance coverage. The DIME method helps you earmark funds to nurture their academic ambitions, giving them a solid foundation for the future.
Note: Add up the four components to determine your total Life Insurance coverage. This comprehensive approach ensures your family is financially secure, allowing them to focus on what matters most.
Determining the right amount of life insurance involves considering several factors. Consulting insurance professionals is often advisable as their expertise can help ensure that you not only select the right coverage that adequately protects your loved ones but also aligns with your budget. Let’s look at some of the key factors influencing coverage amount.
What exactly is a rider in a life insurance policy? Riders are add-ons for extra protection. These add-ons allow you to customise and enhance your protection for a small additional cost. Some of the most popular riders or covers include:
This rider waives future premium payments if the insured becomes disabled.
Pays out an additional sum assured along with the base sum assured in the event of the policyholder’s accidental death.
Upon diagnosis, the policyholder receives a lump sum payment, which can be used to cover medical expenses.
Offers a lump sum or regular payments to compensate for lost income or additional expenses due to disability.
This policy pays out a monthly income for a specified period or until a certain age. This ensures financial support for the policyholder’s dependents.
Pays for expenses related to nursing care, assisted living facilities, etc. Permanent and Partial Disability Rider
Keep in mind that not all riders provide identical coverage. While the Critical Illness Rider steps in during health crises, the Accidental Death Benefit Rider is designed for unforeseen accidents. The key lies in knowing each rider's features and benefits.
Here are some tips on choosing the best life insurance company in India.
What are you looking for in your life insurance? Are you after the basics or something comprehensive? A clear understanding of your needs matters!
Every life insurance comes with unique benefits, and requirements vary from person to person. Look for trusted companies with a good track record in the insurance field.
Who likes dealing with complicated paperwork, especially when things get rough? Look for insurers known for quick and painless claim settlements.
When it comes to term insurance coverage, the ACKO Life Flexi Term Plan provides extensive life coverage at affordable premiums. It is a unique term plan designed to secure your future and your loved ones. With the ACKO Life Flexi Term Plan, you can easily customise your Sum Assured or Coverage amount required to provide safety to financial dependents. You can increase or decrease as per your changing needs.
The following situations might not be covered under your life insurance policy.
When it comes to war or war-related stuff, life insurance might not be your fortress. It's a reality check for times of conflict. Ensure you know this exclusion and consider it in your financial game plan.
If you're into air travel, know that life insurance may not cover deaths related to aviation incidents.
Life insurance is great, but it won't bail you out if you're into extreme stuff like bungee jumping or crazy treks. Keep it real, and know that your insurance might not have your back for these high-risk adventures.
Life insurance might not be helpful around maternity-related deaths. If you're planning a family, understand that this exclusion exists.
Intentional harm like murder won't trigger your life insurance. It's a harsh truth, and it's essential to know that your financial safety net has limits when it comes to criminal acts.
Nature can be unpredictable, and life insurance isn't a shield against all its whims. When natural calamities strike, your insurance might not cover everything. Be aware and factor this into your overall financial preparedness.
Disclaimer:The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.
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Reviewed by Vaibhav Kumar Kaushik 
Acko Technology & Services Private Limited
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