Safeguarding your family and loved ones is always a priority. Now, in this case, you should opt for term insurance above everything else. It is perhaps the purest form of life coverage that you will discover in the market. It offers you the opportunity to financially protect your loved ones in the event of your untimely demise. It works in a simple way: you can purchase a plan from an insurer for a predetermined amount of coverage, and in the event of your passing away within the policy period, the insurer will pay out the sum assured to your nominees. Of course, you have to pay the premiums for the plan throughout this duration as well.
But how much coverage do you really require? That is something that you should be clear about from the outset since coverage matters immensely. You don’t want a situation where your family is left unprotected due to insufficient funds upon your unfortunate and sudden demise. So, here’s looking at some ways in which you can determine the same.
Determining the Right Term Insurance Coverage
Determining the right term insurance coverage is a must before you purchase your policy. Now, in this case, you should evaluate a few things very carefully. To start, create a list of your current liabilities, including debts, loans, and other similar obligations. Then, you should calculate the future goals that your family has, such as the education of your child and others, as well as the expenditure that your family will require in the future (accounting for 6-7% annual inflation). Add all three aspects together and you will get a certain amount. Deduct your present assets (including existing insurance policies) from this, and you will arrive at the coverage that will suit your needs. Some other methods to calculate coverage include the following:
Human Life Value (HLV)-
The HLV indicates your actual economic value or worth. It will give you an idea of the current value of your future earnings, incomes, and investments post deducting the future liabilities and costs (using the formula: (Annual Income – Personal Expenses) × Years Left to Retirement + Current Savings). It can help you estimate the sum you will require to meet your family’s needs in the future.
Income Replacement Value-
It is a simpler way to calculate term insurance coverage based on your current annual income and the years you have till retirement. So here, the formula is the current annual income multiplied by the number of years you have till your retirement (adjusted for 5-7% annual inflation).
Thumb Rule for Underwriters-
You can also estimate your ideal term plan coverage with this method. It makes use of multiples of annual income for reaching a certain figure (as a starting point). For instance, if you’re between 30-40 years, then your coverage should be at least 25 times of your annual income. If you’re between 40-50 years of age, then it should be a minimum of 20 times of your annual income.
Additional Considerations:
- Tax benefits under Section 80C (premiums) and 10(10D) (tax-free payouts)
- Consider adding critical illness riders for comprehensive protection
- Check the insurer’s claim settlement ratio (published by IRDAI)
Get Term Insurance Coverage Today
So, now that you know how to determine the right term insurance coverage for your needs, it’s time to purchase your policy right away. Delaying may leave your family financially vulnerable in case of unforeseen events.
You May Also Read: How Much Should You Really Save for Retirement?
