How Much Term Insurance Cover Should You Have?

How Much Term Insurance Cover Should You Have?

Shreya, age 32 and a single parent was worried in life as she had to take care of her son alone. Like every mother Shreya wanted the best for her son but knew in her heart that everything comes with a cost. She wanted to plan everything for important stages of life so that her son should never fall short of money especially when Shreya is not alive. Shreya’s monthly income was Rs.80,000/-. Her intent was to save money as well as buy protection for her son when she is not alive.  Shreya purchased a Rs.1 crore term plan as she paid Rs.490/-p.m. approximately. The term plan was manageable for her apart from which she could save quite a considerable amount of her earnings.

Like Shreya, everyone can invest in buying a term plan coverage. But at times individuals fail to understand how much term insurance cover they should have.

Before buying the cover, it is important to understand the amount of coverage which you should opt for. Let us dive further to explore how much term insurance cover you should have.

How much term insurance cover should you have?

In a common practice, the total sum assured that you can choose to have under term insurance is:

Minimum Sum Assured =Annual Income X 10 times +Loans/Liabilities.

If you have good premium paying capacity, you must take a sum assured which is 15 to 20 times your annual income. Under the term plan, note that the premium remains the same for the entire policy term. This is why experts recommend that if you wish to build a huge corpus of money, it is highly advisable that you buy the cover when young. At that time in life, the premium is less when you are young. 

Still, choosing the sum assured remains a concern. The table below explains the limit of sum assured that one can choose based on one’s annual income.

Annual Income (Rs.) Sum Assured @15 times  Sum Assured @ 20 times
Rs.1 lakhs 15 lakhs 20 lakhs
Rs.2 lakhs 30 lakhs 40 lakhs
Rs.3 lakhs 45 lakhs 60 lakhs
Rs.4 lakhs 60 lakhs 80 lakhs
Rs. 5 lakhs 75 lakhs 1.00 crore.

Many times, people do not take higher sums insured under the term insurance cover because they fear the high premiums. But the fact is that in term insurance, high cover limits can be opted at comparatively low premiums.

The amount of life cover under the term insurance depends on various factors for which you must be aware.

Factors that affect the life insurance coverage under the Term Plan.

Don’t have any savings plans yet?

Think that you cannot afford the premium of any insurance cover?

Does that bother you?

If yes, then you must not have heard of a term plan which is the traditional life insurance policy. Under the term plan, the life insurance coverage limit under is not restricted but it depends on several factors that include:

  1. The number of dependents in the family: Individuals who have many dependents, must pick a higher sum assured so that the financial needs of all the members can be answered after the unfortunate demise.
  2. Living standard of the family: The living standard of the family also helps to decide the limit of the sum assured. When you want the family to not compromise on their lifestyle, buy  a term plan with a higher sum assured.
  3. Money needed for your child’s education: In case, your children are about to arrive at the age where they have to take higher education, the amount of sum assured must be chosen carefully.
  4. Premium paying capacity: Based on the premium paying capacity you have and can afford, you must select the sum assured.
  5. Current Financial Liabilities: Always evaluate the total number of assets taken against the loans. Buy the term insurance after analysing how your family will deal with the financial stress and liabilities that were taken by you.

The sum assured is based on these factors. If the computation is still not clear, you can arrive at the sum assured using any of these four methods.

Four Methods to Calculate How Much Term Insurance Do You Need.

These are the four methods to arrive at the term insurance coverage limit that you would need:

  1. Human Life Value: The method keeps in consideration the income, level of expenses, probable future responsibilities, and goals to determine the insurance needs. Also take into account how much money it takes to sustain the present lifestyle in future.
  2. Income Replacement: The simplest way to compute the income replacement value through insurance cover is= current annual income X years left to retirement. For example Mahesh had a current salary of Rs.10 lakhs and he is 35 years old. He plans to retire at 60 years. The total amount of cover needed will be Rs.10 lakhs X25 years =Rs 2.5 crores.
  3. Expense Replacement: Under this method, the amount of life insurance cover should be able to replace all the expenses. The amount should be a total of expenses on day-to-day household needs, loans for children’s education, cost of living you afford for dependent parents.

From this amount, you can deduct the value of assets and any existing life insurance cover that you already have. The remaining sum will be equal to the amount of life cover you need.

  1. Thumb Rule: The common rule of arriving at the life cover sum assured is that it should be 10 times the annual income. For example, if your annual income is Rs.15 lakhs, the bare minimum sum assured for the term life insurance should be Rs.1.5 crores.

After choosing the term life insurance, you may feel that the cover is inadequate as the demands in the family may rise in the future. If that happens, do not fear as you can then buy another cover or go for an enhancement of the basic life insurance cover. With the enhancement cover, the sum assured can rise at the important stages of life like marriage of the child or higher education.

Conclusion:

Term Insurance Cover should satisfy the demands of your family in the near future. Compare the premiums and plans here before you make the final purchase decision. Term insurance is a prime requisite for a secured financial future of the family. It saves the family from bearing the expenses of the liabilities which you incurred. Apart from financial security and death benefit, a term plan also offers tax benefit under section 80 C. The amount received by the nominee is also free from tax deduction under section 10(10D).

Ask for the expert’s advice if you are unsure of how much term insurance cover you should choose.