While most of us end up deciding the sum assured or quantum of the life cover without any logical basis, that's certainly not the best way to do it. An adequate life cover is a subjective thing and varies for everyone depending on their personal circumstances and need.
The correct answer to the question would be an amount that is sufficient to provide for the living expenses of the dependents in your absence, till the time they become independent. Besides providing for the living expenses, the cover should be large enough to accommodate for the non-negotiable goals that you would not want them to compromise on. For example, the education of your children. Once you estimate a figure, reduce the worth of your financial assets and the investments that you already have. Because this is the money that you already have and would be available to your dependents.
Add to this any outstanding loans that you may have, e.g., a home loan. Banks either ask the heir to settle the outstanding or settle it by selling the house in the absence of the borrower. And certainly, no one would ever want to pass on the burden of their borrowing to their kin, or worse, deprive them of their own house.
However, it may not be possible for everyone to afford the premium of a life cover as huge as these calculations throw up. In such a situation, go for the next best sum assured that you can afford. Generally, it is advised to have a life cover equivalent to at least 10-12 times of your annual income.
Further, it is a good idea to add a personal accident insurance plan or buy a relevant rider along with your life insurance policy. They are quite cheap to add and specifically cover accidental deaths. In addition, they also provide a lump sum in case of partial or total disability due to an accident. It can be very useful in such circumstances to make up for the loss of income.
The need for insurance varies across stages of life. Someone who has just started their career, is unmarried and doesn't have any dependents, doesn't need a life cover. But as the person progresses in life and gets married, the need for life insurance increases. But it would depend on how independent the spouse is. Likewise for someone with a small kid or dependent parents, the need for insurance is even higher. It generally tapers down with time as you grow older, progress in your career and is able to accumulate a significant corpus through regular investments.
Check our guide to buying life insurance online.
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