How to Calculate How Much Term Life Insurance You Actually Need: A Simple Step-by-Step Guide
How to Calculate How Much Term Life Insurance You Actually Need: A Simple Step-by-Step Guide

As a first-time investor planning to buy a term life insurance policy, one question often crosses your mind: “How much life insurance do I actually need?” In simple words, your debts, savings, family situation, and, most importantly, income play crucial roles in determining the amount of life insurance you actually require.

So, when you intend to choose the right insurance policy, figuring out the approximate amount is imperative. That’s where this post comes in handy. Welcome to our comprehensive guide, where you can learn key parameters before investing in the right insurance plan.

Determining the Value of HLV

You can use a term insurance calculator to figure out the premium and the sum assured for a term insurance plan. Here HVL plays an important. Also referred to as Human Life Value, it is used for calculating the present value of the prospective insured’s obligations, expenditures, and savings.

HLV is used for calculating the amount required to protect the family’s financial future. It’s one of the most important methods that helps you calculate the approximate sum assured you need.

One quick note: HLV’s amount might differ on the basis of the insurance company you choose. However, the parameters that remain constant here are your gender, age, annual income, current savings, and retirement age. Note that outstanding loans and life insurance coverage (at present) are also key parameters that are considered.

Considering Expense Replacement

Each family shoulders responsibilities for managing their daily expenses, such as household requirements (electricity bills, grocery payments, etc.), children’s academic needs, and loan repayments. However, if the breadwinner dies in an unfortunate accident, it may ruin the family financially. Here, the right amount of term insurance can save the family. So, the next parameter to evaluate the policy’s amount is the expense replacement.

You may calculate the sum assured to understand the financial support a family needs in case of your demise. You must deduct the existing assets and investments to acquire the right insurance coverage.

The Thumb Rule of the Underwriter

As far as the thumb rule of the underwriter is concerned, it states that the individual choosing a term insurance plan should opt for an amount that is 10 to 12 times greater than the present yearly income.

Income Replacement Value

The next key consideration is the income replacement value. If the sole breadwinner of the family expires, the family needs to take the financial responsibilities. The prime focus goes towards the endeavours to replace the late breadwinner’s income. That helps the family cope with their monetary requirements.

The Income Replacement Value is assessed by the following formula:

Current Annual Income x Years Left For Retirement

Other Tips to Consider To Assess the Amount of Term Life Insurance

Here’s presenting other parameters you need to consider while calculating the insurance amount:

  • Consider your monthly cost
  • Take note of your financial liabilities
  • Understand the premium amount before investing
  • Evaluate your future financial objectives
  • Consider your age and tenure of the policy

A Concluding Thought

In the race to accomplish the best things in life, we may forget to take care of our health. The biggest example was the COVID-19 pandemic, when people lost jobs, dealt with anxiety, and experienced difficulties in managing their finances.

With the emerging medical concerns, medical treatments have become costlier. That means people should start planning for a secure financial future. On that note, buying life insurance becomes the safest decision. So, if you are considering a term plan, it’s time you assess the above parameters to calculate your insurance amount.

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