How much term insurance do you need?

Maintaining a term plan is very essential especially if you have several dependents and you are the sole breadwinner in the family. It acts as a financial protective shield during challenging and unfortunate circumstances, despite your absence. However, deciding on the correct term insurance amount is very essential so that it can sufficiently act as a protective guard during tough times, despite your absence.

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What is a term insurance plan?

Term insurance is a kind of life insurance offering optimum coverage in a much more cost-effective manner. In the case of any unfortunate incident, if the policyholder passes away during the policy tenure, then the designated family member will receive the sum assured. 

You have to ensure beforehand that the sum assured amount proves to be sufficient for your family to meet the financial requirements, considering the future market inflation and the changing standard of living. Your income should not be the sole determinant of deciding the amount of the sum assured. 

How much term insurance is required?

Before deciding upon the correct amount of term insurance, you need to critically consider several significant factors:

1. Current income: Financial experts opine that the sum assured amount of term insurance should be ideally 15-20 times the policyholder’s annual income. If your annual income is INR 10 lakhs, then your term plan amount should be INR 2 crores. 
2. Age: Age defines the number of familial responsibilities. The beginning of your career is a comparatively lighter time when the family responsibilities remain low. However, a family man has comparatively a greater number of responsibilities and therefore the financial requirements are on the higher side. 
3. Financial assets and liabilities: During the untimely demise of the concerned policyholder, the term plan coverage must be enough to fulfil all the family requirements along with clearing all the outstanding loans and debts. The coverage amount rises with rising responsibilities. 
4. Financial goals: The chief objective of having a term plan is to meet all the financial targets comfortably in sync with maintaining the existing living standards. Some significant financial goals include children’s higher education, marriage, purchasing a house, etc.
5. Affordable premium: You have to decide the optimum amount of premium that you can afford, without making it burdensome on your part. A higher sum assured is alluring, but it runs the risk of premium lapses and defaults. 

Procedure for calculating the ideal term insurance plan

Determining the coverage limit is ideal to ensure sufficient financial security for your family members during your absence. Some crucial methods undertaken to calculate the right coverage protection include:

1. Human Life Value (HLV): This calculates the ideal term cover value depending on your current income and financial status and your future financial targets and liabilities. It includes age, income, expenses, medical history, lifestyle, future financial planning, outstanding liabilities and loans, etc. for determining the current value of your earning capacity compared to the remaining number of working years. 
2. Income replacement: This focuses on replacing the policyholder’s income for a stipulated tenure, usually till retirement. This calculates the term coverage value by multiplying your current annual income by the remaining years till retirement. It ensures to maintain your existing living standards and fulfil the other financial obligations.
3. Expense replacement: it calculates the term cover value by estimating your future financial targets and liabilities for determining the adequate coverage span. 
4. Underwriter’s rule: This is also termed Multiple of Income Process. A fixed multiplier usually ranging between 5 and 10 times your current annual income is decided to determine the ideal term plan coverage amount. This may result in a 1-crore term insurance or 2-crore term insurance depending on the circumstances. However, this quick and easy method does not take into consideration the details of individual circumstances and comprehensive requirements.

Advantages of having a high coverage

Some of the significant advantages of having a term insurance with a high coverage protection include:

1. Enhanced financial security: A higher payout carries the possibility of allowing better coverage for outstanding liabilities and living costs. It ensures better peace of mind.
2. Flexible: Life circumstances may change in a matter of seconds. A higher payout term coverage allows you the protection of handling such challenging and unfortunate circumstances with more ease.
3. Potential for comparatively lower premiums: Certain term insurance plans allow “level term” opportunity where the premium payable amount remains unaltered despite age changes and changes in health status. If you lock in a high coverage earlier in life, it proves to be much more cost-effective than buying additional coverage later. 
4. Estate planning: The death benefits of term plans can be utilised for reducing estate taxes or creating beneficiary trusts. However, you must seek professional guidance here to understand the tax implications well.

How to choose the correct term insurance coverage?

Choosing the right term plan is very critical. It not only involves you but all your family members and dependents. Certain significant factors to consider in this respect include:

1. Budget consideration: Term or life plans are meant to reduce your financial burden. It must never prove to be burdensome ever, even during the plan tenure. Although a high sum assured coverage is alluring, the premiums will also be comparatively higher. You must never fail a premium. You have to carry it comfortably. 
2. Compare: comparing several competent term plans is very essential to understand which will suit you the best. The premium rates and riders vary from one insurer to another. You must clarify all the associated details before proceeding.
3. Consider riders: Several insurers offer various riders with term plans. You must select only those riders that prove to be beneficial for you; otherwise, it will result in unnecessary increase in premium.

To wrap it up:

Thus, determining the right amount of term life insurance coverage that you need, is not only crucial to provide for adequate financial protection to your family, but also provides you with a peace of mind, ensuring that your loved ones can maintain their lifestyle and meet future obligations in your absence. So, take the time to assess your situation thoroughly and make a choice that offers comprehensive protection and lasting assurance.

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Interesting Related Article: “Term Life vs. Whole Life Insurance: How to Choose the Right Policy”