Buying a term insurance plan is a cost-effective way of securing your loved ones’ future. The sum assured from the policy can help you ensure that your family does not face any financial uncertainties in your absence. However, when buying a term plan, a common concern you may face is, “How much term life insurance do I need?”
Selecting the right amount is important, as insufficient coverage may leave your family susceptible to financial problems. However, excessive coverage is also not recommended as it may lead to unnecessary premium payments. To help you with this crucial financial decision, there are certain factors you can consider when calculating the ideal term insurance coverage for you.
Factors to Consider When Calculating Term Insurance Coverage
When seeking to answer the question, “How much term life insurance do I need?”, these are some of the factors you can consider.
Existing Income and Future Earnings
The life cover you choose should replace your income for the number of years your dependents will be relying on it. Hence, consider your current salary, any increase in salary you are expecting, and the number of working years left until retirement. Considering these aspects can ensure that your family maintains their standard of living without financial hardship.
Pending Debts
If you have any loans, credit card debt, or any other liabilities, consider those as well. In your absence, your family would need to settle the debts. Try to clear the debts yourself or ensure that you have accounted for them in your life cover amount. You can choose any amount that suits your needs. Insurance companies offer high cover amounts these days, such as 10 crore term insurance.
Making a well-informed decision now can help prevent additional financial strain on your family during an already challenging time.
Future Obligations
Also, think about major future costs like your children's higher education, their weddings, or your spouse’s retirement. Planning for these now can help your family reach their goals, even if you are not around to support them.
Existing Savings and Coverage
Include your savings, investments, and any existing life insurance when figuring out how much coverage you need. Taking these into account will help you avoid buying more insurance than necessary and will keep your premium costs lower in the long run.
Inflation
As the cost of living goes up over time, the value of your life cover might diminish. Hence, when finalising the term cover, make sure to consider inflation. Ensure that the policy amount will be enough to cover future expenses even after inflation.
In addition to the above, check the affordability of the term plan. To enjoy lower premiums, try buying a plan early. Buying term insurance in your 30s leads to lower premiums compared to your 40s or 50s.
Methods to Calculate Term Insurance Coverage
You can use the following approaches to determine the right coverage amount.
The Human Life Value (HLV) method
This method estimates the total income you would have earned for your family over your working years. It is a way to estimate the value of your financial contributions to your family. The method takes into account your age, job, current and future salary, and when you plan to retire, among a few other parameters.
For example, if you earn ₹10 lakh per year and plan to retire in 30 years, HLV calculates how much money your family would need today to replace that income for the next 30 years.
Calculating the HLV of an individual manually can be quite time-consuming. Instead, you can use the Human Life Value calculator tool to get quick estimates for your life cover. You may also use the term insurance premium calculator. It can give you an idea of the premium for the life cover, so you can gauge how cost-effective it is for you.
Income Replacement Method
This is one of the easiest ways to calculate term insurance coverage. The income replacement method requires you to multiply your current annual income by the number of years left until you retire.
For example, if you earn ₹10 lakh a year and have 30 years until retirement, your coverage should be ₹3 crore (₹10 lakh × 30).
However, keep in mind that this method does not consider your savings, existing insurance, or future expenses like education or medical needs.
Multiplying Income Method or the Underwriter’s Rule
Like the income replacement method, this involves multiplying your annual income by a factor (like 10 or 15). For instance, if you have an annual income of ₹10 lakh, you can choose a cover between ₹1 crore to ₹1.5 crore (10 lakhs x 10 or 15). You can buy a term insurance plan for ₹1 crore or ₹1.5 crore sum assured to ensure sufficient protection for your family.
While this is a relatively easy method, it does not consider your unique financial situation.
Expense Replacement
Instead of income, this method considers your expenses to figure out how much coverage you need. To use the method, review the future costs your family will face. This includes everyday living expenses as well as major costs like your children’s education, life events like weddings, and any loans or debts.
Add these together, then subtract any savings or existing life insurance you may already have. The amount you get is the coverage you will need to make sure your family can manage their financial needs in your absence.
With the above methods, you can choose the best policy for life insurance that meets your needs and gives you peace of mind. Before you finalise any plan, make sure to compare term insurance plans from different insurers. Doing so will allow you to get a clear idea of what’s available in the market as per your budget and preferences and you can make a well-informed decision accordingly. For personalised guidance, you can also reach out to a financial consultant.
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