When you are carrying out your financial planning, one of the most important decisions you will be making will be about the life cover of your term plan. You might face questions like: What should be the right amount for your term insurance plan? Should you opt for a medium-coverage plan with a ₹50 lakh sum assured or go for a high-coverage ₹2 crore term insurance policy? The right amount should be based on several factors and finalised after thorough research. Here’s a guide to help.
What to Consider When Choosing Your Term Insurance Coverage?
Before deciding on the right term insurance amount, you need to assess your personal and financial situation. Keeping these factors in mind can help:
- Income
Your coverage should replace your income for the number of years your dependents will rely on it.
- Financial Dependents
The more the number of people financially dependent on you, the higher the coverage you will need.
- Outstanding Liabilities
Any ongoing loans, such as a home loan, education loan, or car loan, must be covered by the term insurance plan.
- Lifestyle and Monthly Expenses
Include your family’s current lifestyle and future cost of living to arrive at an accurate figure.
- Long-Term Goals
Consider the expenses your loved ones will likely incur in some years’ time, such as children’s education, marriage, your spouse’s retirement needs, and more
- Existing Insurance
Also, take into account any other life insurance policy you already have.
Using a term insurance premium calculator can help you estimate the premium based on your ideal coverage amount.
Different Ways to Calculate Your Term Insurance Coverage
There are a few proven methods you can use to calculate the coverage that fits your financial needs. Let’s explore the most commonly used approaches in a term insurance plan:
- 1. Human Life Value (HLV) Method
The Human Life Value method calculates the present value of all future income that you would have earned if you had lived until retirement.
It works by taking into consideration your annual income, liabilities, current and future expenses, and more. Then, you adjust for inflation and factor in your retirement age as well. Manual calculations may prove difficult. Hence, just like the term insurance premium calculator, you can use the Human Life Value calculator to get a clear estimate of the amount.
- 2. Income Replacement Method
This is a simple and straightforward way to determine your coverage. The idea is to ensure your family continues to receive your income even in your absence.
How it works:
Multiply your current annual income by the number of working years left.
Example:
If you are 35 and plan to work until 60, that is 25 years. If you earn ₹8 lakhs a year, it means you will need about ₹2 crores in life cover. A ₹2 crore term insurance may be ideal for most middle-income earners in their 30s and 40s.
You can use a term insurance premium calculator to see how much premium this coverage would require and adjust it as needed.
- 3. Underwriter’s Rule
Insurance companies often use a thumb rule for quick estimations, which recommends life cover of 10 to 15 times your annual income.
How it works:
Just multiply your income by 10 or 15, depending on your age and financial commitments.
Example:
For someone earning ₹12 lakhs a year:
10x = ₹1.2 crore
15x = ₹1.8 crore
You can use a term insurance premium calculator to get estimates for policies that offer this much coverage.
While the above methods can help you in choosing the right coverage amount, it is always advisable to personalise the process. Look at real-time inflation rates, any illnesses your loved ones may be susceptible to, and other aspects that can affect your family financially. Only then should you finalise the sum assured for your term insurance plan.
Choosing the right term insurance cover is crucial to securing your family’s financial future. A term insurance plan should be sufficient to replace your income, clear debts, and fund life goals for your dependents. Whether you choose a ₹2 crore term insurance policy or another amount, make sure it is based on your actual financial needs. Use a term insurance premium calculator to fine-tune your plan and ensure your loved ones are well protected.
