How to Choose a Life Insurance Plan According to Your Income?
Buying life insurance is one of the most important decisions you will ever make. This is because it secures you and your loved ones from unexpected curveballs that life may throw. Irrespective of what your income is, if you have dependents, you need life insurance. If you have liabilities, you need life insurance to ensure that in your absence, your dependents do not find it difficult to repay your debt.
When you buy a life insurance policy, you are buying financial protection for your loved ones in your absence. In case of your demise during the policy duration, your nominee receives a death benefit. This death benefit acts as income replacement for your loved ones. To ensure that your loved ones have the protection of life cover, you, being a policyholder, are required to pay timely payments of the premiums. There are several types of life insurance policies available designed to fulfil the needs of different policyholders. You need to ensure that you buy a life insurance policy that you can continue with ease while also enjoying a sufficient sum of coverage.
Before narrowing down your choice from different life insurance plans, it is important that you calculate the sum assured you need. Sum assured is the amount that your loved ones will receive in case of your sudden demise. Ensure that you consider the needs and lifestyle of your dependents, along with the debt, to get an estimate of the coverage you need. Once you know the sum assured you need, here is how you can choose from different life insurance plans based on your income:
Take your current expenditure into account
Buying life insurance and paying its recurring premiums is an expensive affair. When you buy a life insurance plan, you first need to ensure that your family’s basic needs and standard of living are not being affected. A simple method is to add all your monthly expenses and multiply them by 12. This provides you with an estimate of your annual expenses. Now add the expenses of the premiums to the list of your existing expenses and evaluate if you can pay them easily. Also, when you are calculating your basic expenses, take inflation into account. If you have limited funds after reducing the basics, you can opt for term insurance. They are affordable types of life insurance policies that offer huge coverage for minimum premiums.
Income multiplier method
Your income plays a huge role in determining the life insurance policy you will purchase, and the sum assured that you will select. Whether it is whole life insurance or a term plan, ensure that the premium you choose is a value you can pay off easily. There is an income multiplayer method where you simply have to multiply your income by the age group you belong to, to get an estimated amount of your sum assured. After you get the sum assured, deduct the expenditure you incur from your net income. After that, use the factor of multiplication.
For Example: If you are in your late 20s, your minimum insurance coverage will be calculated by multiplying your income by a factor of 15. While the maximum insurance coverage will be calculated by multiplying the same by a factor of 20. Even though you get an idea of the sum assured that you need to choose, things may change over the years. When your income grows, your lifestyle would also grow, and so would the sum assured for your dependents. Look at your sum assured every five years to ensure that you have sufficient coverage.
Liabilities and assets
Your current assets comprise your salary, wealth, gold, property, securities, and any other form of savings or investment. Liabilities usually include home loans, car loans, and existing debts or expenses. Once you are aware of your needs, you can choose the right type of life insurance accordingly. Earlier, individuals preferred traditional insurance products like whole life insurance. However, with more awareness of the insurance industry, policyholders explore several options before narrowing down their choices.