While purchasing term insurance is a smart decision, finding the right coverage is crucial. The term insurance plan proves beneficial to suffice for your family’s financial future when it is calculated appropriately. If you are unsure how to do it, here is a detail to help you out.
Methods to Calculate a Suitable Coverage for Term Insurance
There are different ways to calculate suitable coverage for term insurance. You can consider utilising these methods when purchasing an online term plan or otherwise.
- Thumb rule – The most common thumb rule used in term insurance is that the sum assured should be 20 times your annual income if you are between the age group 40-50 years and 25 times your annual income if you are 20-30 years old.
- Economic value – Economic value refers to the human life value. While calculating the economic value, you need to consider your current income and expenditure, future liabilities and investments. Based on your current lifestyle, you need to determine the financial requirement for your future expenses considering the inflation.
For example, you can consider the usual grocery, medical, entertainment and other necessary expenses, future liabilities such as clearing off debts, paying for your child’s education, marriage, etc. In addition, it will help you determine the exact life insurance term coverage required.
- Based on income – If you are the sole earning member in your family, you can also determine the necessary sum assured based on your income and the years left to retirement. For example, if you are 45 years old and earning ₹6 lakhs annually, your sum assured will be the product of your annual income and the years left to retirement, 15 in this scenario.
Therefore, the required maximum term insurance cover is ₹90 lakhs. If the life cover required is a huge value, you can determine the affordable premium and the policy tenure by using the calculator while purchasing the online term plan.
- Based on expenses – Another best way to determine the term insurance cover is to calculate the future expenses considering household expenditures, loans, and other money goals such as the child’s education, marriage, etc. While you derive this value, you can subtract your current investment and money value to determine the life cover required.
For example, if your future financial requirements equal ₹50 lakhs, and you have investments worth ₹15 lakhs, your term insurance coverage will be ₹35 lakhs. However, while calculating the suitable coverage using this method, ensure that you consider the inflation rate on the future expenses.
Choosing suitable coverage using these methods can be extremely beneficial. However, it is also important to choose flexible term insurance plans that allow you to increase the term insurance coverage based on increasing financial needs. For instance, the Tata AIA term plan provides options to increase the life cover at different milestones, such as when you get married and be blessed with children, etc. It is important to choose such products because you may not know the exact future expenses during policy inception.
Finding suitable term insurance coverage is extremely important to let the product benefits suffice for your family’s financial needs. The term life insurance coverage should not be a random value. It should be based on your income, expenses, economic value or the general thumb rule. While considering these methods, it is also important to account for the inflation rate. Choose the product by comparing different options, calculating the sum assured and deciding on the affordable premium rate!