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What has your income got to do with the Life insurance amount you are insured for?

A life insurance policy is not meant for your benefit but for the benefit of your financial dependents. The benefit is that in case of an unfortunate event your dependents will not be impacted financially.

Many of us are “sold” insurance. We rarely buy it. An agent, who is often a relative, comes to us as soon as we get our first jobs and says, “Beta/Beti, congratulations on getting a job. Now you should secure your future and invest in this insurance plan” or something to that effect.

Insurance amounts have generally, so far, been based on what you can afford to pay. This limits how much insurance you can afford in case of traditionally sold endowment or ULIP policies. The insurance you can thus afford tends to be tiny compared to what you will realistically need.

But apart from this usual factor, there is something else we ignore entirely.

Your income and Life insurance

Ask yourself, what benefit is there in buying an insurance policy?

In essence, a life insurance policy replaces your income in your absence. Ideally this should also provide for an annual increase to keep pace with inflation.  

A life insurance policy is not meant for your benefit but for the benefit of your financial dependents. The benefit is that in case of an unfortunate event your dependents will not be impacted financially. They would be able to lead their lives as if your salary was still coming in. Therefore, if you have a child, he or she should be able to pursue their education, as if you were still saving for their education. Your dependent parents, or your dependent spouse would be able to meet their living expenses without worrying about where the money would come from.

In essence, a life insurance policy replaces your income in your absence. Ideally this should also provide for an annual increase to keep pace with inflation.  

So, how much is enough?

Your insurance amount depends on:

#1. What is the income it needs to replace

How much life insurance do I need?

You should have insurance for
as per your age and salary

Disclaimer: The amount shown is merely indicative and is subject to change depending on your actual needs and life situations. We recommend you speak to a qualified financial planner to find out exactly how much insurance would be sufficient for you.

#2. For how long.

So when you are younger, the income to be replaced is smaller but it needs to be for a longer period. As you get older, the income required increases and the time period goes down.

What this also means is that for you to be adequately insured, a term life policy is the best option. With ULIPs and traditional policies, your premiums for adequate coverage are prohibitively high.

And if your insurance amount is not enough, your family will not get the benefit you are intending to give them.

So, if you are thinking about getting insured, don’t forget to consider your income first. 


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