How Much Term Insurance Do I Need?

The main objective of buying a term insurance plan is to make sure that your loved ones will have sufficient money to live comfortably if you die untimely. However, one of the important questions to consider is “How much term insurance do I need?” Various policy buyers in India tend to purchase a term life insurance policy of Rs 1 Crore, a very large amount. 

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But most seekers buy a plan randomly without thinking about the coverage amount. So, how much term insurance can I buy? How to determine the right amount of coverage? Let’s discuss them in detail:

How To Decide Term Insurance Amount?

According to financial experts, ideally, you should buy term plan with a life cover of at least 10X of your current annual income. However, the term insurance cover amount depends on various factors. Here is a list of the factors which can help you answer the “How much term insurance do I need.” You should take these into consideration before purchasing a term plan that provides comprehensive protection.

  1. Your Yearly Income

    Assessing your existing financial condition is one of the important factors to consider in deciding the term cover. As per the insurance experts, your term life insurance coverage should be at least 15 to 20 times your current income (annually).

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

    If your current income is Rs. 10 LPA annually, it would be better to buy a term life insurance policy of Rs. 2 Crores. This amount will help your loved ones meet their yearly expenses and maintain their living standards.

  2. Your future and current financial liabilities and assets

    Financial liabilities such as business-related loans, credit card bills, and home loans are important parameters to consider before purchasing term cover. In case of your unfortunate death, the burden of repaying the amount will come on your family who may find it difficult to manage household expenses and EMIs. In order to avoid these uncertain scenarios, you should choose a term insurance policy with large coverage that fulfills all your current liabilities.

  3. Assess Your Future Objectives

    The most basic reason to purchase a term plan is to help your family retain 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 most important factors when buying a term plan, as your financial requirements and objectives may change at various stages of life. For eg., a married individual has liabilities and may require a high amount of term insurance life cover as compared to the time nearing your age of retirement.

  5. Your Term Plan Tenure

    The tenure of the term insurance plan coverage is a crucial factor when deciding on “How much term insurance do I need?” You need to make sure that you are covered during the most vulnerable phase of your life i.e., old age. You can buy a term plan that provides cover for your whole life (till 100 years of age) and select to pay the premiums for a limited period (during your earning years.) You can use a term insurance calculator which is an online tool available for free that can help you decide on the right tenure 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.

  6. Your Term Insurance Premiums

    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.

Methods to Calculate How Much Term Insurance is Enough?

As we have discussed above on ‘how much term insurance do I need,’ you can calculate the cover amount through any of the following methods:

  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 income expenditures, predictable future liabilities, and objective to purchase the insurance are taken into consideration.

  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. 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

Choosing the appropriate life cover is essential as, “how much term insurance do I need” directly affects you and your family’s life. Let us take a look at some of the tips you should keep in mind when selecting the right term life cover:

  • Add Riders to the Base Plan

    Term plan 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 Benefit Rider, and Waiver of Premium Benefit Rider.

  • Using Term Life Insurance Calculators

    Term life insurance calculators can help you compute the required premium for your desired life cover amount. It is the quickest and easiest solution if you find yourself questioning - how much term insurance do I need? 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.

Wrapping It Up!

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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