Your life cover should act as a replacement of your income when you are not around and hence should be based on
Salary
Business income
Rent income
Interest
Dividend
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Don’t forget the impact of inflation. If you find your life cover to be very high, remember that it may not be worth as much after 10 or 20 years.
Your insurer might offer you a lower cover due to your age or income. You can go ahead with the lower cover, and increase it later.
Every year that you wait to buy term insurance, your premiums increase by 4-5%. This increase can be as high as 12-17% in your 40s. So buy early and lock in cheaper rates.
This decision is not cast in stone. Revisit it when you see a big change in lifestyle (i.e., when your income changes significantly).
Was this a bit too simple? Did we miss anything? No, we didn’t. There’s no other method you need to calculate the correct life cover.
It’s common to calculate life cover at 10x your current income. This math is overly simplistic, and covers your family only for 10 years post your passing. You have no way of knowing if this amount will even be adequate for your family.
Avoid this ‘rule of thumb’!
You may come across detailed calculators that consider your income, expenses, liabilities, and many other factors. But they function more on standard assumptions than on actual facts.
They don’t make your decision any more accurate.
We could have created a complicated, and supposedly accurate, calculator for you, too - but we chose not to.
Because a broad calculation based on your income and policy duration is enough.
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