Term insurance is a very important requirement for life. It allows you to keep your loved ones financially secured at an affordable and low rate. It also offers other benefits such as tax rebates and high life cover. You get a lot of advantages when you buy a term insurance plan. However, to ensure you get the maximum value out of your term insurance cover, you should get a sufficient life cover. This is a very important calculation that you should carry out with care and precision. Take a look at this article to know more about the factors to keep in mind when calculating your ideal life cover.
To begin with, you need to make a budget. Everyone wants to have the largest and most comprehensive term insurance coverage but keeping your finances in mind, that may not always be possible. This is why you need to take a good and a very realistic look at the money you have and you can spare towards paying the term insurance premium.
Once you know what you can afford, you can start looking at your options. You should get a term plan that is affordable so that you do not struggle to pay the premium each time.
Pro Tip: If the premium is too high, you may start with lower coverage and then increase it later when your income increases.
Next, you need to consider your age. As a young person in your twenties or thirties, you are the main breadwinner of the family. Your family depends on your income for all their needs. You pay the school fees of your kids, you pay for the rent, you pay for the groceries and you also pay for all the medical expenses. At such a time, you need a very large life cover to ensure that even if you die, your loved ones can use the corpus from the term plan to pay their bills.
However, as you age, your financial responsibilities begin to dip. Thus, an older person, say in his late forties or early fifties may require a lower term cover than what a 27-year-old young parent does.
Pro Tip: Of course, buy it young! Let me quickly give you an overview.
In ICICI Prudential Life Term Insurance Plan, a 30-year old non-smoking male would have a pay a premium of INR 10,348 for coverage of INR 1 CR for a duration of 30 years, i.e. till 60 years, a total of INR 3,10,440 would have to pay for the entire duration.
However, the premium for a 40-year old non-smoking male would have a pay a premium of INR 16,205 for coverage of INR 1 CR for a duration of 20 years, till 60 years i.e. a total of INR 3,24,100 would have to pay for the entire duration.
So, if you had opted for a 1CR term plan at the age of 30, then you would have saved INR 13,660 along with 10 years of additional coverage! Isn’t that a great incentive to opt for a term insurance plan early in life?
c. Size of the Family
The next and very obvious point to consider is the size of the family. If you are the policyholder who is the primary breadwinner supporting a family consisting of yourself, your spouse, three young kids and your aged parents, you will need a very high term life insurance cover. If however, you have a nuclear family consisting of you and your spouse, a much smaller term cover would suffice.
Pro Tip: Therefore, you need to calculate the number of dependent family members you have and get a term cover that is large enough to protect the financial requirements of all your dependent family members.
d. Other Sources of Income
In some families, the policyholder is the sole breadwinner. In other families, there are various sources of income.
For example, if your spouse has a steady income, or if your parents receive their pension, or if you have a property from where you get rent, your family will have alternative sources of income. In that case, your financial liability will be lower and you can get a smaller term life cover.
Pro Tip: If you are the only earning member of the family, you will need a large life cover as your family’s plan B.
e. Lifestyle of Family
The lifestyle of the family also plays a role in determining what the value of the life cover should be. If you live in an expensive apartment in the heart of the city and if your kids go to the best private school, you will need to have a high term life insurance cover. You would surely not want your loved ones to move into a smaller house and your kids to enrol in a free school after you are gone.
Pro Tip: Since you would want them to be able to continue with their current lifestyle even after your demise, so you have to make this calculation very carefully.
The next and one of the most crucial factors to keep in mind when calculating your term life insurance cover is the amount of debt you currently have. If you have taken loans such as business loans or home loans or you have mortgaged property, you need to have a life cover that is high enough to cover your debt. If you die before you repay your loans, your family will be held responsible for clearing the dues. That may become very difficult and burdensome for them.
Pro Tip: In order to prevent such a situation of crisis from arising, you should look to get a term insurance cover that will help to pay off all the loans if you die within the policy tenure.
g. Future Financial Milestones
And finally, you should keep all the future financial milestones of the family in mind before you buy a term life insurance cover. If you have children whose college fees you have to pay, or whose marriage expenses you have to bear, you need to have a term cove that is high enough to cover these expenses. If you have parents who require surgeries, you need to factor in those costs too.
Pro Tip: In short, your term life insurance cover should be large enough for your family to be able to meet all the important financial milestones even if you die unexpectedly.
If you correctly assess all the points mentioned above, you will be able to arrive at the correct figure and get a term plan with the most appropriate life value. Use an online term insurance premium calculator to calculate the premium you will have to pay for the plan so that you have a realistic idea about the costs. Then, you must compare the options and find the best plan at the best rate. Thankfully, term insurance can be bought online these days and the processes of using calculators, comparing and buying have become a lot simpler and also very convenient.