After the COVID-19 pandemic, people have started giving importance to term insurance. Term insurance fulfills the financial needs of your family in case of your sudden death. But how much term insurance coverage is enough is a big question.
Term Insurance coverage depends on an individual’s lifestyle, income, number of dependents, age, and various other factors. You can calculate the term insurance coverage with the help of a term insurance calculator. In this article, we will try to know how much term insurance coverage is sufficient for an individual. But before that, let’s understand the meaning of the term insurance coverage.
What does the Term Insurance Coverage mean?
Term Insurance Coverage means a sum assured that will be paid to the nominee of the policyholder in case of his/her sudden death in an unfortunate event during the policy tenure. One can also increase the protection and coverage amount by adding rider benefits to the policy.
Some of the rider benefits that can be added to the term insurance are waiver of premium, terminal illness benefit rider, etc. You can calculate the term insurance coverage with the help of a term insurance calculator.
How Does the Term Insurance Coverage Works?
Let us understand the term insurance coverage with an example:
Suppose that you are 25 years old and currently have an annual income of ₹ 600,000. To take care of your family in your absence, you take into consideration the sum that is 12 times your annual income. This comes to ₹ 72,00,000.
So, if something happens to you during the policy period, then your nominee will receive ₹72,00,000. This ₹7200,000 is term insurance coverage.
The sum your nominee will receive will be tax exempted as per the IT Act. You can also add rider benefits to the term plan so that the overall term insurance coverage amount increases.
How Much Term Insurance Coverage is Required?
Term insurance coverage varies from person to person. Certain factors need to be taken into consideration to determine the term insurance coverage amount.
1. Analyse Your Monthly Expenses
Before you decide on your term insurance coverage, analyse your monthly expenses. It shall cover your electricity bill, water bill, mobile phone bill, fuel expenses, grocery bills, gas bill, etc., and all other expenses.
Suppose that your monthly expenses come to around ₹25000 pm, which comes to ₹300,000 per annum. You shall have term insurance coverage of around 10-12 times your yearly income. So, in the present scenario, considering high inflation, rising education costs for your children, and the health cost of parents, a multiple of 15 times would be suitable. This comes to the insurance coverage amount of ₹45,00,000.
2. Think about Your Liabilities
Financial liabilities like business loans, home loans, credit card dues, etc., shall also be considered while determining the term insurance coverage. Because in case of your passing away, your family will have to bear the burden of monthly payments. So, go for a term plan that covers all your liabilities.
3. Consider Your Future Goals
The main purpose of a term insurance plan is to support your family in case of your absence. So, do consider your future goals while determining the term insurance cover. It shall cover future goals like children’s marriage and their higher studies, creating a retirement fund for your spouse, etc.
4. Age Factor
The age of an individual also plays an important role in determining insurance coverage. As your financial needs and goals are different at different ages.
A young graduate who has just started earning and has fewer responsibilities may not require much of a high-valued term plan. On the other hand, a person who is married and has kids may require a term plan with higher coverage.
How to Calculate Term Insurance Coverage?
There are four methods popularly used in the calculation of Term Insurance Coverage.
1. Human Life Value
In this method, the Human Life Value is taken into consideration for the calculation of insurance coverage. In this calculation, the income, monthly expenses, outstanding debts, and age are considered.
2. Income Replacement
This method is based on the assumption that insurance shall compensate the lost savings of the sole earning member. Here, the existing yearly income is multiplied by the number of years left in retirement to derive the insurance coverage amount.
3. Expense Replacement
This method is recommended by financial advisors. In this method, all daily household expenses, loans, and goals such as child education are taken into consideration. The amount so derived is the money that your family will need in your absence. From this amount, you need to deduct the investments you already have.
4. Underwriter’s Rule
Under this method, you can have a sum assured of around 10 times your annualised income. This means if your present annual income is ₹20 lakhs, then you will need a term insurance coverage of ₹2 crores.
Tips to Choose Appropriate Term Insurance Coverage
If you are confused regarding the amount of term insurance required, then here are some tips to guide you.
1. Take Riders
To increase the coverage amount, you can take the rider along with term insurance. There are many riders available, like accidental disability benefit rider, accidental death benefit rider, critical illness rider, etc. You can take this rider by paying an additional amount of premium.
2. Use Term Life Insurance Calculator
Term Insurance calculator can help you to calculate premiums for your term plan. You can bring variations in policy duration, insurance coverage and premium payment mode and calculate the premium. In this way, you will be able to arrive at appropriate insurance coverage for a term plan.
3. Buy Term insurance online
Buying term insurance online can reduce your premium. This is because you get insurance online at a discounted premium. Hence, you can buy more insurance coverage at a lesser premium.
Term insurance is taken to take care of your family in your absence. An adequate term insurance coverage is necessary so that it is sufficient to fulfil all your family’s daily needs and goals. You can use a term insurance calculator to determine the insurance coverage amount.
Must take these 3 addons with Car Insurance! If trouble comes, we will save money
Urgent Collaboration Needed for Digital Security: Minister Vaishnaw