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The Long Read
Everything you *need to know* is right above this. Scroll down, only if you'd still like to read more (honestly, why?)
Choosing your life cover is one of the most important decisions you will make when buying term insurance as it will decide how financially secure your family will be if you pass away unexpectedly.
When it comes to deciding that amount, what really matters is that your life cover = Policy Term x Current Annual Income
When deciding your life cover amount, you may come across calculators that take into account your income, expenses, liabilities, and other factors.
But unfortunately, these calculators function more on standard assumptions than on actual facts. As a result, they don’t really help you make an accurate decision.
You may have heard of this rule of thumb that your life cover should be 10x your current income.
However, this math is overly simplistic. Going by this rule, your life cover will replace only 10 years worth of your income. This means your family will mostly be taken care of for only 10 years after your demise. How can you be sure that this amount will be enough for their financial protection in your absence?
Our advice: Avoid this ‘rule of thumb’!
It is the pre-tax income that you earn by actively working, aka the income that’ll stop coming in, if you were to pass away suddenly.
It includes your salary and business income but doesn’t include your rental income, interest and dividends.
Use this to determine the life cover you should opt for to protect your family even in your absence.
If your insurance policy allows it, then yes, you can change your life cover after buying term insurance.
In fact, it’s a good practice to keep reviewing your term plan to see if your life cover is adequate for your changing life responsibilities. If your current term insurance does not allow you to increase your life cover, you can always buy a second term plan, for an additional life cover amount.
For example, the life cover you chose when you were unmarried may not be sufficient for the life cover your family will need after you are married and have a kid or two to provide for.
If your life cover is not enough to meet your family’s needs in your absence, you are at risk of being underinsured.
To know if your life cover is adequate, check the formula:
The additional life cover you need to get = Current annual income x Number of years you plan to work for from now* - Current cover
*It means the number of years after which you will take a chill pill with your work. You could retire or take up your hobby full time.