Term insurance is the simplest form of life cover wherein the insurer agrees to pay the policyholder’s nominee the sum assured should the insured die during the policy’s tenure. It is the most common type of life insurance policy taken by individuals. With customers’ evolving needs, insurance companies offer flexible features to the basic term life policy and conveniences in transactions, such as the online term policy option for purchase and renewal.
How Should I Compute My Term Life Insurance Coverage?
There is a clear awareness that term life insurance is essential; however, many do not know how much coverage they should take under the policy. There are two approaches to computing the term life insurance coverage required: the income approach and the expense approach. It is more beneficial to use the expense approach to calculate the coverage required.
Here are the steps to compute how much term insurance you would need.
- You must begin with noting your current income and expenses. If you have family and other dependents, you will have unavoidable expenses for which you must include the annualised value after adjusting for inflation.
- You should consider various loan obligations that have fixed outflows. Then, considering the number of years required to pay off the loans, you should compute the annualised value over the loan term.
- Factor in the cost of life events such as children’s higher education, marriage, etc.
- Consider the number of years left for the retirement.
- Estimate a corpus for stress-free retirement living for you and your spouse.
- Compute the savings from other sources and increase in returns or wealth from investments.
- Take the annualised value of the expenses and all the outstanding amounts for fixed commitments and add them to 20-25 times your annual salary.
- Deduct the expected future value of sources of savings, and you can get the amount of coverage required. You should reduce this value by any existing term policy you may have.
If you are unsure how to determine the coverage, you can use a term life insurance calculator to compute the coverage and the premium to be paid.
Why Should We Choose more Coverage?
The amount of coverage as computed above would seem more. However, experts advise that in term life insurance, more coverage is advisable for two simple reasons: low relative premium and adjustment for inflation.
As premium on term insurance is computed according to the applicant’s age, health status, lifestyle habits, and period for which coverage is required; if you are a younger applicant, the premium would be quite low for the extensive coverage you wish. This is because, considering your younger age and habits, your risk of death is perceived to be lesser. Therefore, more coverage can be obtained at a relatively cost-efficient amount over the policy term.
The second reason, namely, inflation, is affected by several factors in the economic situation prevailing in the country and around the world. Therefore, it is always better to adjust for the higher inflation value so that the low sum would not constrain your family assured should something sad happen to you. In addition, choosing suitable add-on riders# enhances the coverage.
Another important aspect in choosing a better coverage is the timing of the policy term with that of your outstanding loans. By maintaining this correlation, you can plan effectively to pay off your loans and be assured that even if you die before closing the loans, your family will have sufficient funds to repay them and be debt-free.
What are the Advantages of Term Insurance?
Term insurance is considered an inevitable part of the financial plans of individuals. From the time people begin earning, the importance of a term insurance policy is felt. The benefit of life term policy cover is huge opposed to the small premium paid. Some of the important advantages of a term plan are as follows.
- Low premium: The premium on term insurance policies is low opposed to the coverage offered as the risk is spread over a long term.
- Better coverage: The term life policies offer more sum assured because the risk is perceived to be less for the long tenure of the policy.
- Ease of purchase: Term insurance policies can be purchased easily either offline or through the websites of insurance companies or aggregators. The documentation required is simple, and the process can be completed quickly.
- Flexibility: The death benefits can be paid as a lump sum or in staggered payouts according to the needs of the insured person’s family. This helps them in managing their finances better and avoid unnecessary bottlenecks.
- Overcoming the debt cycle: Term insurance plans are a great source of support to the family in meeting outstanding debt obligations if the policyholder were to pass away suddenly. This offers assistance during the trying times after the primary earning member is not around, and there can be a delay before some form of regular income starts coming in.
- Tax* deductible: The premium paid on term life policies is eligible for deduction under Section 80C of the Income Tax Act. The death benefit received is exempt from tax* under Section 10(10D) of the Income Tax Act.
How Can I Purchase Term Insurance?
You can buy term insurance online from the websites of leading insurers. For example, you can purchase the Tata AIA term policy in three simple steps. You can log on to their website and input the basic details. The premium calculator would provide you with the premium amount for the coverage you require. You can submit the documents and also pay the premium online. Then the policy document would be available for download, and a soft copy is also sent to your email address.
A term life policy is the easiest and most affordable policy for life insurance with the protection of the interests of your family members in your absence. It is advisable to meticulously estimate your expenses and financial obligations and use a term insurance coverage calculator to compute the coverage required.