Know How Much Term Insurance Cover Is Needed

How Much Term Insurance Cover Do I Need?

Selecting the right term insurance cover is important in securing the financial security of your family in future. Experts advise coverage of 10–12 times your annual income, keeping in mind the debts you owe, the expenses for the future, and your lifestyle. You can use calculators or take financial advice in determining an amount that will provide proper protection to your dependents. In this article, we will discover how to determine the ideal term insurance coverage and what factors to take into consideration.
 

Calculating your Term Plan Coverage

What is the meaning of term insurance coverage?

Term insurance coverage is the predetermined sum assured paid to nominees upon the policyholder's death during the policy term. It also includes optional add-on benefits like accidental death coverage that enhance the total payout.

How does term insurance coverage work for someone?

Lets take an example: Here’s how Rajesh calculates his coverage step by step:

Step 1: Monthly expenses: His family spends ₹50,000 a month (₹6 lakh yearly). Using a 15x multiple, he needs ₹90 lakh for future expenses.

Step 2: Liabilities: He has an outstanding ₹60 lakh home loan to be covered.

Step 3: Life goals: Children’s education and marriage will cost about ₹25 lakh.

Step 4: Retirement corpus: His spouse will need ₹70 lakh for retirement.

Step 5: Existing wealth: Rajesh has ₹40 lakh in investments, which reduces his total coverage needs.

Total Term Insurance Cover Rajesh Needs

Expenses/Investments	Examples	Amount
Future household expenses (+)	Utility bills, groceries, education, healthcare	₹90 lakh
Liabilities (+)	Outstanding home loan	₹60 lakh
Future life events/goals (+)	Children's education and marriage	₹25 lakh
Retirement corpus for spouse (+)	Spouse's post-retirement needs	₹70 lakh
Liquid assets (-)	Mutual funds, fixed deposits	₹40 lakh
Total term insurance cover Rajesh needs		₹2.05 crore

How to get adequate term insurance coverage?

Most financial planners suggest that your term insurance cover should be a minimum of 10 times your yearly income. The multiplier considers the expenses your family will have on a day-to-day basis, future inflation rates, and other unexpected situations they might encounter during your absence. While considering sufficient coverage, consider all the financial responsibilities like unpaid loans, medical expenses, and other significant life events.

For example, if your kids are in prep school and are small, your cover should be able to cover their higher education and wedding expenses 10-15 years later. Adequate term insurance ensures that your family's aspirations and financial goals are not affected even in your absence, providing them with complete financial security.

 

Methods of calculating your term plan coverage

You can determine your ideal term insurance coverage using one of these four proven methods:
 

Human Life Value (HLV)

 This method helps you understand your financial worth to your family. It considers your future earnings and potential investments, then subtracts your expected expenses and liabilities. The remaining amount represents what your family would need to maintain financial security in your absence.
 

Income Replacement Value

This is the simplest way to calculate coverage. Just multiply what you earn yearly by how many years you have left until retirement. This ensures your family receives the same income they would have gotten if you were still working and supporting them.
 

Analysis of Needs (Expense Replacement)

This method adds up everything your family spends now and will spend in the future like school fees, weddings, loan payments, groceries, and bills. Once you have this total, subtract the money and assets you already possess. The final figure tells you exactly how much coverage your family needs.
 

Underwriter's Thumb Rule

This simplified calculation uses income multiples based on your age bracket. For example, if you fall in the 30-40 age range, you should consider coverage worth 25 times your annual income. If you earn Rs 10 lakh annually, your ideal coverage would be approximately Rs 2.5 crore.

Things to keep in mind when calculating your term insurance cover

You should consider these essential factors:
 

Include your monthly expenses

Begin by making a note of every recurring expenditure your family handles every month. These may include food, utility and phone expenses, rent or property taxes, travel, and school fees or college tuition of children. Having a clear idea of these costs ensures your family is able to continue its lifestyle and be comfortable in handling day-to-day finances in your absence.
 

Create a list of your debts

Maintaining a record of your current debts is just as essential while determining your term insurance coverage. Put down all the pending dues like credit card bills, home or personal loan EMIs, and car loans. This helps you to have a realistic estimation of how much your family may need to pay these liabilities in the event of your untimely demise. Having these liabilities covered by your policy will safeguard your loved ones from any future financial burden or repayment pressure.
 

Set financial goals

Your family should be able to pursue their dreams even if you are not there.  Incorporate future costs such as your spouse's retirement funds, your children's college education, and their weddings.  To safeguard your family's future, include these major life goals in your coverage since they require a substantial financial investment.   
 

Assess your policy tenure

Your life stage determines ideal policy duration. A 25-year-old single professional might need coverage until retirement, while a 40-year-old parent requires extended tenure covering their child's maturity and spouse's retirement. Align your policy terms with your family's dependency period.  
 

Consider your current wealth

Evaluate existing assets like savings accounts, mutual funds, fixed deposits, stocks, real estate, and retirement funds. These resources provide immediate financial support to your family. However, assess their liquidity by how quickly they convert to cash and subtract outstanding liabilities to understand your net worth accurately.

 

Conclusion

Term insurance exists primarily to safeguard your family's financial well-being in your absence. Look at costs incurred each month, liabilities to be settled, goals for the future, and the family’s long-term financial independence. Knowing the real reason for buying term insurance and choosing the right cover amount will help your family maintain their quality of life and achieve their life objectives even in your absence.