How to estimate the right sum insured?

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Insurance serves as the foundation of the road to build wealth, as the right risk cover make the journey not only smooth but also bump-free. The right insurance policy makes sure that your financial goals do not get derailed due to any emergency. For example, life insurance offers financial help to the family against the risk of the untimely death of the insured, health insurance protects one against the risk of hospitalisation, personal accident cover protects against the risk of accidental death and loss of income due to any disability, home insurance is needed for protection from natural and man-made calamities. While buying the right cover is important it is equally essential to buy an adequate cover so that you remain fully prepared if any eventuality strikes.

Here is a guide on how to decide the right cover size:

Estimating your life insurance needs

One of the easiest methods is to have the insurance cover at least 15-20 times of your annual income so that a family remains financially covered before they adjust to the financial consequences of death. For example, if the salary of the policyholder is is Rs20 lakh, then the insurance cover should be at least Rs 3-4 crore, as the interest income at an assumed rate of 5% will make the family earn lakh 15-20 lakh every year. Another method is the Human Life Value (HLV) Method. It is calculated as the present value of all your future income, less personal expenses such as life insurance premiums and taxes. Between the two calculators, human life value is better, as it estimates your needs more precisely.

Estimating your health insurance needs

The health cover depends on various factors such as treatment cost, rising medical inflation to the city you are living in. Though you might be having a group insurance policy from your employer it is advisable to buy a separate policy as it becomes difficult to buy a health cover as one grows older. Accordingly, people living in non-urban cities should have the cover of at least Rs5-10 lakh, while in metro cities it should be around 10-25 lakh given the lifestyle and family medical history.

Estimating your personal accident insurance needs

Accident impacts the repayment capabilities of the person, particularly if the person has too many financial commitments such as home and personal loans. Therefore, while deciding on the cover size you need to take into account your liabilities as well as inflation for deriving at the amount you need for repayments in case of any permanent or partial disability.

Estimating your home insurance needs

Home insurance covers only the cost of the construction of the house. Therefore, do not insure property based on the market value because it is based on the cost of land. Decide on the sum insured based on the area of your house multiplying it with the cost of construction in your city. Second, content coverage should be based on the market value of the articles less depreciation. Similarly, jewellery and other valuables should be properly valued before getting them insured under the home insurance policy.