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How Much Term Insurance Cover Do I Need?

The amount of term insurance cover you need will depend on your individual circumstances and financial goals. It is recommended to have a term insurance cover that is at least 10 to 12 times of your annual income. This amount can be adequate to meet future needs and manage inflation rates. However, to determine the exact amount of coverage you need, you should consider factors such as inflation, loans, income, lifestyle, income, and other financial goals. But before we determine how much term insurance cover do I need, we need to understand the meaning of term insurance coverage. 

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What is the Meaning of Term Insurance Coverage?

Term insurance coverage refers to the life cover (sum assured) which will be payable to the nominee in case of the policyholder’s unfortunate death during the policy term. In addition to this, it also includes additional rider benefit like accidental death benefit that can increase the payout provided to the family. To purchase the best term insurance plan for yourself, you need to ensure the life cover is enough to help your family maintain their current quality of life, pay off any loans, and are able to take care of their day-to-day expenses.

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How Does Term Insurance Coverage Work in India?

Let’s understand this with the help of an example: 

Let’s say you are 20 years old and your current annual income is Rs. 10 Lakhs. In order to ensure that your loved ones are taken care of in your absence, you can consider a sum that is around 20 times your annual salary i.e., Rs. 2 Crore. In case of an unforeseen demise during the policy tenure, your family members will be provided with a death benefit of Rs. 2 Crore.

In case you added a term rider along with the base sum assured of Rs. 2 Crores, such like accidental death benefit, your loved ones will also get an additional benefit with the sum assured.

How Much Term Insurance Do I Need?

Here is a list of the factors you should take into consideration before calculating your ideal term insurance coverage amount.

  1. Assess Your Monthly Expenses

    Always assess all your expenses before determining the ideal life cover. This includes electricity and water bills, grocery bills, rent, fuel expenses, clothes, and all the other expenses.

    Let’s say, the monthly expenses of Raju’s family are Rs. 50,000 which comes to around 7 Lakhs annually. It is generally suggested to provide coverage of 10-12 times of the yearly income. This is considered on the basis of higher inflation rates, increasing costs for his kids, and healthcare expenses for his parents. Raju’s coverage, at a multiple of 15 times, based on future house-related expenditures would be around 1 Crore.

  2. Consider Your Financial Liabilities

    Financial liabilities such as business-related loans, credit card bills, and home loans can fall on your family’s shoulders in case of your unfortunate death. Your family may find it difficult to manage household expenses and pay off the outstanding loans. Thus, in order to avoid these uncertain scenarios, you should choose a term insurance policy with large coverage that fulfills all your current liabilities.

  3. Take Your Future Goals into Account

    The most basic reason to purchase a term plan is to help your family maintain their current lifestyle in case of your unexpected death. This financial backup can help your family in achieving important future goals such as your child’s marriage or paying for their higher education, creating a retirement corpus for your spouse, or payoff any unexpected medical emergencies that may arise. Thus, the payout of your term insurance plan should support your family members to meet all your expenses.

  4. Age

    Age is one of the important factors in determining adequate term insurance plan coverage for you and your loved ones. For a young individual a term life cover of 1 crore might be enough to cover their financial obligations like education or home loans, whereas for an older individual who is married with kids, a 1 crore term cover might not be enough to cover their financial needs. It is recommended to purchase a term plan at an early age because the premium of your term insurance increases with age.

  5. Your Term Plan Tenure

    You can have different responsibilities at different life stages. For example, at 25 years of years, you are possibly single with few responsibilities, and thus a policy term securing you till 60 years might be enough. But at 40 years of age, you are likely to have a spouse or a kid and thus might prefer purchasing a term plan with coverage for your whole life i.e., till 99/100 years of age.

  6. Your Term Insurance Premiums

    Always purchase a term plan that fits your budget, as then you would be less likely to miss premium payments due to insufficient funds. You can compare the premiums offered by different plans and insurers based on your needs online. You can also use a term insurance calculator to see the required premium amount for your desired life cover.

Methods to Calculate How Much Term Insurance is Enough?

Following are the four methods that can help you compute how much term life cover you need:

  1. Human Life Value (HLV)

    This method determines the Human Life Value (HLV) or the economic value of an individual to the family. In this, your annual income, monthly expenses, outstanding loans and liabilities, and age are taken into consideration. This helps you decide the cover amount that you should opt for.

  2. Income Replacement

    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.

  3. Expense Replacement

    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, and also providing financial help to dependant parents for their whole lives.. The number you reach is the whole amount of money that your loved ones need. The other step is deducting your investments' current value and the cover you already have.

  4. Underwriter’s rule

    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.

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Tips to Choose Appropriate Term Life Cover

In case you are still wondering, “How much term insurance do I need,” here is a list of tips that can help you figure out the right sum assured for your term life insurance.

  • Add Riders to the Base Plan

    Term riders are added to the base plan to enhance the plan's coverage. You can add any of these add-on riders by paying an extra amount along with the base premiums. There are several important term insurance riders available; Accidental Death Benefit Rider, Accidental Disability Benefit Rider, Critical Illness Rider, Hospicare Benefit Rider,and Waiver of Premium Benefit Rider.

  • Using Term Life Insurance Calculators

    Term insurance calculator can help you compute the required premium for your desired life cover amount. You can also calculate the variation in premiums with the change in policy duration, life cover, and premium payment mode.

  • Buying Term plans online

    Buying term plans online ensures you get the maximum discounts and lowest premium rates for your term life insurance. It is also easier to keep track of the plans online and pay your premiums timely from the comfort of your home.

How to Buy Term Insurance Plans in India?

You can buy the best term insurance plan in India by following the below-mentioned steps:

  • Step 1: Go to the term insurance plan page

  • Step 2: Enter your name, gender, date of birth, and phone number

  • Step 3: Click on ‘View Plans’ and fill in your smoking habits, annual income, occupation type, and educational qualifications

  • Step 4: Select the most suitable plan and proceed to pay

Wrapping It Up!

To understand ‘How much term insurance do I need’, you need to assess your financial needs and obligations. Since this amount will be paid to your family in the event of your unfortunate death, the life cover amount should be enough to cover your family’s monthly expenses like loans and child’s fees. You should also consider adding the right riders as they can provide extra coverage against a range of eventualities.

FAQ's

  • Q. What does term insurance cover mean?

    Ans: Term insurance cover means the amount for which you are purchasing the plan. Term insurance is a pure-risk plan that provides the sum assured amount to the nominee in case of the policyholder’s unfortunate death during the policy term.
  • Q. What is not included under term insurance cover?

    Ans: Term insurance covers death due to a lot of reasons like accidents and serious illnesses, but a term plan does not cover deaths caused by self-harm incidents like suicide, or HIV/AIDS. Most term insurance plans cover death by suicide after the end of the first policy year.
  • Q. How much term insurance should I take?

    Ans: To figure out the appropriate term insurance cover for your family, you need to factor in your annual income, monthly expenses, outstanding loans, and other financial obligations.
  • Q. How much term insurance should I buy in India?

    Ans: You should buy the most suitable term insurance after comparing term plans online on the basis of their premium rates, CSR values, policy terms, and sum assured.
  • Q. What is the thumb rule for term insurance?

    Ans: By the general thumb rule, you should buy term insurance at least 15 to 20 times your current annual income. This way your family will be able to maintain their current quality of life even after the potential inflation.
  • Q. What is the ideal age for term insurance?

    Ans: The ideal age to buy term insurance is as early as possible. This is because the premiums increase with age and if you buy term plan at an early age you will be able to secure a large life cover at low premium rates.

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