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Need assistance in choosing the right insurance plan? Get a call from our Expert.

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How to Decide Term Life Insurance Coverage Size?

Uncertainties in life see no age, gender, marital status or income level. Unfortunate events can occur at any time, leaving you and your family to struggle in the absence of a solid financial plan. The most critical component of a comprehensive financial plan is a term insurance policy.
 

Term life insurance plans are one of the simplest and also the most affordable types of life insurance. That is why these plans are ideal for everyone who cares for their family and wants to financially secure them in their absence. However, when buying a term plan, it is critical to take into account several important parameters. The most significant is the coverage size of your insurance policy. Buying a cover that does not meet your requirements will defeat the entire purpose of a term policy.


 

How many years of term insurance coverage do you need?
 

These vital factors below can help you decide the coverage size of your term insurance plans:
 

  1. Present financial status: 


    Your current financial status in terms of income and expenses is the prime component in determining the size of your term plan. The objective is to select a term plan size that is affordable and does not financially drain you. For this purpose, you must understand your current income level and the expenses you incur.
     

    Moreover, how much would you need to maintain the existing standard of life? Ideally, you would need a policy sum that is large enough to replace your income, fulfil expenses, and also sustain the lifestyle. Also, the figure must factor in inflation to a considerable extent.
     

    As per experts, the thumb rule is to get an insurance cover up to 8-10 times the annual income. However, given the rising cost of living in India, some experts advise a cover of up to 18-20 times the annual income. But it is essential to consider the age of the policyholder here as well to ensure correct term insurance coverage based on not only the financial requirements, inflation and liabilities but also the policyholder’s age. The next point explains how.
     

  2. Age at the time of purchase:


    Your age at the time of buying a term plan influences your coverage size. The older you are, more are the chances of an eventuality. And simultaneously, you would require more coverage in sum assured. Also, generally with age, the health deteriorates, increasing risk further.

    Hence, when deciding a term plan coverage focus on your age. Also, different life stages, like marriage, divorce, childbirth, retirement, etc.have different requirements. Below is a table that gives a fair idea of the coverage size as per age bar:
     

  3.  

    Age

    Term Plan Coverage Amount

    Between 25 and 35 years

    20 times the current income + outstanding financial liabilities

    Between 36 and 45 years

    15 times the current income + outstanding financial liabilities

    Between 46 and 55 years

    10 times the current income + outstanding financial liabilities



  4. Current and future financial liabilities: 


    Your outstanding or expected major financial liabilities are one critical factor to consider when deciding your term plan coverage. For this purpose, you must list down your existing outstanding loans, debts, mortgages, credit card dues, etc., and then include any future liabilities like the marriage of a child, buying a home, etc.

    Once you know the dues, assess if how much of your current assets, including liquid or near-liquid ones, can help to pay off these liabilities. You should take into account your cash deposits, bank account balances, stocks, mutual funds, properties, etc. Assess the difference in liabilities and assets, and ensure you buy a term plan with at least that much in sum coverage.
     

    This is critically important if you are the sole breadwinner of the family because, after your death, the family could be severely burdened with liabilities, in the absence of a term plan.
     

  5. Financial objectives:


    Your short-term and long-term financial objectives majorly impact your term plan coverage size. Usually, everyone has some specific financial goals, which they aim to achieve over a due course of time. These generally revolve around the financial duties and security of the loved ones. These include buying a house, children’s education, investing in a new business for the child, marriage of a child, etc. So, the higher your short-term and long-term financial objectives, the greater should be your term plan coverage. 

  6.  

  7. Tenure of your policy: 


    A vital thought that must influence your decision of sum coverage is what happens if you outlive your term life insurance? The tenure of your term plan or the time for which you want to be covered greatly impacts your term life insurance coverage. You must assess the number of years for which you need term insurance coverage and accordingly choose coverage.

    When you are young, you have your whole life ahead of you and a lot of financial responsibilities. In this case, you must go for the maximum sum coverage available because you do not want to outlive your term life savings. Such as, if you are 30 years old and wish to retire at the age of 65, you should get a term plan that is at least 35 years long. Overall, when you ask how many years of term insurance do I need? The answer is simple; the longer your tenure is the better your coverage. 

     

L&C/Advt/2023/Feb/0649

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Disclaimer

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not a guaranteed issuance plan, and they will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.