Does the rule of thumb for life insurance always applicable? Have a look.
Life insurance is indeed a necessity for every individual. Along with the right insurance policy, choosing the correct amount of insurance coverage is equally essential. To calculate the right insurance coverage, for yourself, there is a prevalent notion, and experts also recommend the same that is ‘Rule of thumb’.
According to the thumb rule of insurance, the coverage amount, or the death benefit amount should be equal to 5 to 10 times of your annual income. It is a good method to evaluate the range of coverage you need; however, do you know that the rule of thumb for life insurance does not work for everyone? So, in this article, let’s understand how this thumb rule of insurance works and what such scenarios are where it does not fit in.
Five to 10 times the annual income is enough to replace the lost yearly salary for a few years until the dependents of the deceased policyholder get back on their feet. The insurance coverage amount can help in paying off outstanding debts as well as other expenses like child’s education cost and financial backup for spouse retirement years amongst others. These are some of the significant cost, and besides, there are also daily expenses which can’t be ignored. Now if you sum up all these expenses, you will see that the total will come somewhere in the range of 5 to 10 times of your yearly income. Therefore, in this way, the rule of thumb for life insurance works.
Situations where the thumb of rule is not applicable.
Stay-At-Home Parents: Parents who stay at home to raise their kids do not get any compensation. In such case as per the rules of thumb for life insurance, they will not be eligible for any life cover as the financial earnings are zero. However, still, you need life insurance to secure your child’s future or manage the day to day expenses. Now consider the total cost for childcare and regular expenses every year and multiply with the number of years your child will need financial assistance. You will see that a stay at home parent with toddlers requires higher life insurance as compared to a parent with teenagers who will be financially independent in a few years.
A family with young kids: Families with growing children need more finances. As children grow, their expenses also increase, such as the cost of their schooling and childcare. For all of these, one needs ten times more than the yearly salary. Even think about the expenses of future like higher education fees, other costs like food, clothing etc. and then imagine how much time it requires to collect sufficient funds to fulfil all needs of your family. If you carefully review all the requirements and the costs involved, then you will find that 10 times higher amount than annual salary is not enough to fund a family’s lifestyle. Therefore, the rule of thumbs for life insurance does not work in cases like this.
Reaching retirement age: If your spouse is staying at home parent then you need to think about his or her future as well, that includes medical expenses with the growing age, living cost and more and then plan accordingly. Such that your spouse doesn’t have to be dependent on others.
Therefore, the rule of thumb does not apply, if you have debts and dependents like ageing parents, siblings who need long-term care or any other circumstances. That’s why you must consider and calculate your personal needs carefully.
The rule of thumb is quite a helpful method to get the answer to how much insurance coverage you require, but the ideal solution varies from person to person. To analyse your needs, you have to understand what you want your life insurance to cover. It can help you to cover:
- Child care expenses
- Children’s future educational expenses
- Any loan like a student loan or other debt
- Loss of income that helps to manage the daily costs of your family
- A substantial saving with the help of tax-free death benefit and many more.
Although you can calculate your coverage amount through online insurance calculator, you should keep a track on your requirements. Analyse whether the rule of thumb is applicable in your case or not and get the assurance of choosing the right amount of coverage to protect your family financially. You can visit BimaKaro.in to get customised term plan quotes based on your needs from the top insurers in India.