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Deciding whether to take up life insurance is the easy part. Working out how much cover you need can be the tricky part.

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Deciding whether to take up life insurance is the easy part. Working out how much cover you need can be the tricky part.

Some things to think about when you are calculating your cover level are:

1).The Time Factor

One of the most crucial elements of calculating your insurance amount is the term of your policy. The ideal tenure of your policy should be your retirement age minus your present age. For example, if you are a young investor of 35 years and wish to retire at 60, you can purchase a policy with a 25 years tenure.

2).Annual Gross Earnings

The thumb rule is to multiply your annual gross earnings by 10(higher for younger investors) to determine the ideal amount for your insurance cover.

3).Liabilities

All debts like car loan, home loan, other personal loans, or credit card bills must be considered while calculating your insurance cover. A summation of these debts should be added to your cover.

4).Future Requirements

The primary purpose of insurance is to assure that your family is able to maintain its standard of living even after you are gone. Your insurance cover must be sufficient to cover routine expenses, EMIs, and household expenses. If you have young children, you must estimate the education costs and add it to your insurance amount.

5).Savings

The sum total of your savings must be deducted from your insurance cover for the final amount. Liquid assets such as cash, fixed deposits and gold fall under this category.

A thumb rule to calculate life insurance cover is:

Insurance cover = Annual gross earnings (*10) liabilities future requirements %u2013 savings

Also see: How to choose the right term for your term plan

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