The most important part of purchasing a term insurance plan is understanding how much term insurance coverage you will need to protect your family. Term plans are generally quite flexible in terms of coverage.
Most people buy a term policy for the low premiums but often fail to choose the right sum assured that will give their family adequate financial support in their absence. For this reason, you should understand how to get sufficient term insurance coverage for your family or dependents.
How to Get Adequate Term Insurance Coverage?
Most financial experts advise that your term insurance coverage should be 10 times your annual income. This is because, apart from their daily sustenance, this amount is meant to factor in the future rate of inflation as well as any emergency needs that your family may have in your absence. You will need to consider all your family's future needs, be it unpaid loans or a medical emergency, so that you can gauge how much cover for your term plan will be needed.
For instance, if you have young children who have just started prep school, you will need to finance their college or university fees or their marriage 10-15 years later. However, in case of your untimely demise, they should not have to give up on their dreams. If you ensure that your term insurance coverage can finance their future education, wedding and so on, then you can be worry-free that their future aspirations will not be hampered.
Calculating your Term Plan Coverage
- Human Life Value (HLV)
Using the Human Life Value method, you can understand an individual’s economic and financial worth. You can know the value of their future income, earnings, and investments after all the future expenses and liabilities have been deducted. This figure will represent how much financial support you can create for your dependents or family members to utilise in your absence. It is popularly used to calculate term insurance coverage as your family will need to have an adequate sum assured in case of your untimely death during the policy term.
- Analysis of Needs
Under this method, the term insurance coverage is calculated by considering each and every family member’s total expense. This will also include any future costs and expenses, such as the birth of a child or the future education expenses of a young child. You will need to consider everything from the present-day expenses to the expenses going up to the life expectancy of the youngest family member. This is what your analysis of needs calculation should include:
- How many family members are there, and what are their requirements?
- Do you have any liabilities, such as loan EMIs or debts to be repaid?
- What are the education and marriage expenses for the children?
- How will your family continue to maintain their standard of living?
- Should there be an emergency fund for the family?
After calculating a total amount based on the above questions, deduct your investments and assets from the total, and you can know the term insurance coverage you need.
- Income Replacement Value
This is one of the simpler methods by which you can calculate term insurance coverage. Here you can calculate your annual income and the number of years until you retire from your profession.
- Underwriter’s Thumb Rule
The underwriter’s thumb rule will give you an estimate of the term insurance coverage needed for your family. With the help of multiples of your annualised income, you can arrive at a number that will be the sum assured of your term plan. For instance, if you are between 30 to 40 years of age, your term plan coverage should be 25 times your annual income.
Hence, these are the four methods used to calculate your term insurance coverage. However, do note that the final figure can only be an estimation and your lifestyle requirements and other costs will affect the actual amount of term insurance coverage needed. TATA AIA Life Insurance has a range of term insurance plans that you can choose from so that you can opt for coverage as per your needs.
Many people purchase term insurance plans only for investment purposes and tax*-saving benefits which is why, quite often, the amount of term insurance coverage they calculate is not enough for their families. To avoid this, it is necessary to realise the importance of term insurance in the lives of your dependents and how it can protect them in your absence.