How much term insurance do I need? – is a common question in various people’s minds whether they are buying groceries or an insurance policy. Finding a solution to this question, specifically about term insurance, is a critical pre-requirement in your pursuit of finding a term cover that provides comprehensive protection. If you are purchasing term insurance online, various parameters need to be considered with your lifestyle to select the right cover. However, before assessing the needed cover, it is important to understand what term insurance is.Read more
Term Insurance is the purest and simplest form of life insurance. It provides financial support to your loved ones at the most pocket-friendly rates. With term insurance, you can easily get a large life cover amount i.e., sum assured at a comparatively low premium rate. The amount of benefit is paid to the nominee in case of life assured’s death during the policy tenure.
The term insurance depends on certain factors such as health and age. If you are planning to buy term insurance online, you can use the freely available online term insurance calculator to assess the cost of your term insurance cover. As every person lives a different kind of lifestyle, the right term plan would recognize these varied sides to provide overall protection.
Ideally, it is suggested to have a term plan cover at least 10X of the annualized income. However, the term insurance cover amount depends on how one determines his/her requirements and makes an informed decision as per their appetite of risk to make sure the suitable cover amount to protect their family. Certain factors should be taken into consideration to purchase the right term plan that provides overall protection. Based on your financial and personal conditions, you need to determine the amount that would be required as an income replacement for your loved ones in your absence. Insurance buyers sometimes fail to include inflation as a factor in their insurance cover, but this is an important factor to be taken into thought.
Here are decisive factors that need to be included in your computation for the right amount of your term insurance plan:
The first step is to calculate how much term insurance is needed in determining your present annual income. The thumb rule of insurance says: It is recommended to purchase at least 10-15X your annualized income, taking inflation and increasing living costs into consideration. For example, if you have a yearly income of Rs. 5 lacs, it is wise to opt for a term cover of at least Rs. 75 lacs.
However, this value also depends on your present age while purchasing the term insurance plan. When buying a term plan at younger ages, you need to consider a higher rate of inflation, along with a number of changes in the dependencies and liabilities. The older you get, the lesser dependants you have. So, up to 35 years, your term cover should be 15 to 18 times your annualized income. This number decreases as your age increases. Like 35 to 40 years aged individuals are required around 10 to 12 times the annualized income and the old aged people require 5 to 10 times. This further should be decided based on the following points:
Farsightedness is important for purchasing the right term insurance policy that will secure your family against future and present financial liabilities. Insurance buyers should consider their assets, outstanding loans, debts while choosing the sum assured amount for the term insurance plan. In the case of assets, you should observe your investments which might involve provident fund (PF), FDs, real estate, mutual funds, etc. The full amount that would be available to the family can be deducted from the amount of insurance cover.
Families might find it difficult to manage loans, EMIs, and debts along with household expenses in case of the unfortunate death of the policyholder. If you are a sole earning member of the family, then it is important to purchase a cover that will meet your future and current liabilities.
The foremost objective of purchasing term insurance is to help retain the lifestyle of your family even in case of your absence. Achieving important financial objectives such as marriage planning of your child, child’s higher education, retirement corpus for your spouse should be incorporated into the term insurance plan.
The tenure of the term insurance plan cover is a crucial factor while purchasing an insurance plan. You need to make sure that you are covered during the most susceptible phase of your life i.e., old age. A term insurance plan calculator is a freely available online tool that helps decide on the right term for your plan. It is recommended to purchase a term plan at an early age because the premium of your term insurance increases with age.
Term insurance pays a fixed amount in case of the policyholder’s death. However, the premium payment should be on time. Various people opt for insurance far more than they require. A high sum assured comes at a price and one is required to pay a relatively higher premium for the complete policy tenure. It is suggested to take a term insurance premium that fits into your budget.
This method determines the HLV or the economic value of an individual to the family. In this, income expenditures, predictable future liabilities, and objectives to assess the insurance requirement is taken into consideration.
This method assumes that life insurance should substitute the lost savings of the sole earner. The easiest way to compute the income replacement value is Term Insurance cover = Existing yearly income X retirement years left.
This method is suggested by financial advisors, in which an individual is required to compute their daily household expenditures, debts, and objectives such as a child’s education. The number you reach is the whole amount of money that your loved ones needs. The other step is to deduct the current value of your investments and the cover you already have.
For computing the minimum term coverage, you require, you can go as per the common thumb rule of having a SA that is around 10X of your annualized income. Thus, if your present income is Rs. 10 lacs, you should opt for a life cover of at least 1 Crore.
Term insurance plans are the smartest way to protect and support your loved ones financially, even in case of your absence. However, to get complete benefits from the plan, it is important to include the important financial elements into your planning kit. Moreover, because financial requirements can change over the years, so it is important to revisit your plan cover every 5 years.
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