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How to Choose the Amount of Coverage You Need for Term Insurance

Updated on: 13 October,2022 03:07 PM IST  |  Mumbai
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Human existence is unpredictable, and the loss of the family's primary breadwinner can cause significant upheaval in the family's daily lives. A term plan is a great way to create a safety net for your finances if such a situation arises.

How to Choose the Amount of Coverage You Need for Term Insurance

Unquestionably, term insurance is essential, but the real question is how much insurance you should purchase. Industry experts frequently advise this straightforward formula: 15–20 times your annual salary should be covered by term insurance. So, for instance, if your yearly income is 10,000, you should obtain coverage for at least Rs. 1.5 crore. But, there are nuances to selecting an appropriate life cover for yourself.

How Much Life Cover Do You Need?

The cost of term insurance depends on several variables, including age and health. If you intend to purchase term insurance online, you can estimate the cost of your term insurance coverage using the free online term insurance calculator. Every person has a unique lifestyle, and the best term insurance would consider these varying aspects to offer comprehensive protection.

There are three methods to calculate the amount of life cover you require:

A. Income Replacement Method - This method assumes that life insurance cover should act as a substitute for the policyholder’s income in case of their untimely demise. It can be calculated by multiplying the annual income of the policy buyer by the number of working years left.

B. Expenses Oriented Method - The first step in this method entails the summation of your monthly household expenses, debts, and long-term goals like funding your child's education or providing for their wedding. Then, the next step subtracts from that amount the total value of your current investments and any life insurance coverage you already have. The final amount is the required life cover.

C. Human Life Value (HLV) Method - The HLV is calculated by taking into account the income, expenses, any future liabilities, and life goals to determine the need for insurance.

Things To Keep In Mind While Choosing Your Life Cover

When choosing the best term insurance policy that offers comprehensive protection, you should consider a few things:

1. The first step is determining how much term insurance you'll need after factoring in your current annual salary. This can be calculated using any of the above-mentioned methods.

2. Choosing a term insurance policy that protects your family from present and future financial obligations requires foresight. Insurance purchasers should consider their assets, outstanding loans, and debts when selecting the sum assured for a term insurance plan.

3. The primary reason to buy term life insurance is to support the maintenance of your family's living standard even in the event of your demise. The term insurance plan should include provisions for achieving significant financial goals, including kids' marriage, child's education, and financial support for your spouse in your absence.

4. When choosing an insurance plan, the tenure of the term insurance plan is an important consideration. You must ensure that your family is protected at least till the time you are the sole breadwinner. A term insurance calculator is a tool available online for free that aids in selecting the ideal term for your plan.

5. The premium payments must be made on time to maintain the life cover. The cost of a high sum assured is that one must pay a significantly higher premium for the entire policy term. Choosing a term insurance premium that won't break the bank is advised.

When Should you get term life insurance?

The answer is that the earlier you start investing in it, the better. The premiums are lower if you buy a term insurance plan when you are younger, which is the ideal time to purchase term insurance policies. Early-term insurance investment is a sign of a good investor. Early investment is preferable because the likelihood of contracting diseases is lower while you are young. Your premium increases as you age since lifestyle-induced health issues and risks creep up.

How can you benefit from investing early?

If you opt to purchase a term plan in your 20s, you stand to gain in the following ways:

a. Lower Premiums and Higher Cover

b. Longer Policy Term

c. Financial Bandwidth for Other Investments

d. Tax Benefits

You can learn more in-depth about these benefits of a term plan online.

Can you increase your life cover at a later date?

An individual's financial burden also grows over time as they age. To plan for your children's financial future, pay off debt, build a retirement fund, and amass riches for the future, among other things, you must get older and get married. Therefore, the sum assured of the coverage should rise together with rising financial needs. An increasing-term insurance plan enables you to take care of your family's financial obligations in your absence and supports maintaining a comfortable lifestyle.

The best way to safeguard and financially provide for your loved ones, even during your absence, is through term insurance products. However, it is crucial to incorporate the essential financial components into your planning kit if you want to profit from the plan thoroughly. Additionally, reviewing your plan's coverage every five years is crucial because financial needs can vary over time.

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