Explained: How Much Term Life Insurance Cover Is Enough? Here's How To Calculate It

We are often told about the importance of having term life insurance in life, right? After all, who doesn＊t want to secure his/her loved ones＊ financial future? But as soon as we realise life insurance＊s importance, the next big question is: how much term life insurance cover do you need? Rs 20 lakh, 50 lakh or 1 crore?

Well, just some basic math is required to answer it yourself. But first, let us understand what term life insurance is and why it is needed.

What is Term Life Insurance?

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Just like its name suggests, a term insurance policy provides life insurance cover for a specific period, which is chosen by the policyholder. The primary aim of term insurance is to cover the nominees＊ financial future in case of policy holder＊s untimely demise during the policy tenure. The fact that term policy is a simple and plain insurance plan aimed to provide replacement income to your nominees in your absence, its premium is highly affordable, especially considering the huge cover amount it offers.

Also, once you begin earning, do not keep on waiting to arrive at a ＆suitable age＊ to buy a term insurance plan. The earlier you purchase it, the lower your premium will be.

Key Benefits of Term Insurance

- Not only does the policyholder pay fixed premiums throughout the entire tenure of a term policy, but even the premium paid is highly affordable, and probably the lowest amongst various life insurance plans, especially for the huge cover.

- Relatively simpler product in understanding and working, when compared to others like endowment, money-back or ULIP.

- Different variants of term insurance like increasing cover plans and return of premium plans to cater to differing needs and preferences of policyholders.

- Availability of tax benefits. The premiums paid towards the term policy can be claimed for tax deductions under Section 80C of the Income Tax Act.

- Even the death benefits received by nominees or maturity benefits received by the policyholder are completely tax-free.

- Multiple Death Benefit Payout Options in the form of lump sum or staggered payout like monthly, half yearly etc.

How Much Term Life Insurance Cover Is Enough?

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Well, ideally it is advisable to buy a term life insurance cover amounting to at least 10-15 times your annual income. So, for example, if your annual income is say Rs 6 lakh, a term life insurance cover of at least Rs 60 lakh- Rs 90 lakh can turn out to be adequate. You can of course opt for an even higher coverage if eligible.

When deciding the cover amount, keep in mind to factor in the dependent＊s monthly expenses, your existing and expected liabilities and investment contributions towards crucial life goals and stages and your existing assets and accumulated wealth.

Also Read: Why Life Insurance Premiums Are Cheaper For Women

Calculating Term Life Insurance Cover Amount

If you wish to calculate the term life insurance cover amount in a detailed manner, here's a step-by-step guide to help you with the calculation.

Let's take an example. Kumar is a typical 35-year-old working professional, who has stretched finances. God forbid, in case of his untimely death, his family's financial future would be jeopardized.

He lives with his wife, his parents and his two children aged 7 and 3 years. Their monthly expenses are around Rs 60,000. Plus, he pays an EMI of Rs 30,000 every month for a housing loan. Rs 70 lakh is still outstanding. As per ET Money, here's how he can calculate the term insurance cover amount:

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Step 1 每 Factor in your dependent＊s monthly expenses:

Kumar＊s family's monthly expenses are Rs 60,000, which comes to Rs 7.2 lakh per year. It is generally recommended to provide coverage at 10-15 times the annual expenses. While this is entirely Kumar＊s call, in his case, a multiple of 15 is suggested to account for higher inflation, rising education costs for his children, and the healthcare costs for his parents.

At a multiple of 15 times, Kumar＊s coverage on the basis of future household expenses would be Rs 1.08 crore.

Step 2 每 Evaluate your liabilities

The most difficult situation one can leave their family in is with a pile of debt. Kumar has an outstanding of Rs 70 lakh on his home loan which is his primary burden that needs to be taken care of.

Step 3 每 Assess important life events and goals

Kumar has two young children who have a number of milestones coming up, that includes their education and marriage. Kumar wants the best for his children and has already set up a monthly SIP of Rs 7,000 to create a corpus of Rs 20 lakh over the next 15 years to manage their higher studies. His untimely death will put these goals in jeopardy. Hence it is wise to add this amount to Kumar＊s term life insurance coverage requirements.

Step 4 每 Retirement corpus for your spouse

Kumar also needs to leave a corpus for his wife which can grow over time so that she can manage her retirement. And, he reckons his wife will need at least Rs 80 lakh in her retirement kitty.

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Also Read: How Gear Type Affects Car Insurance Premium

Step 5 每 Factor in your existing wealth

Besides factoring liabilities like home loans, credit cards, and other money you owe to others while calculating term insurance coverage, you should factor in your investments made over the years. These investments can be accessed by your family upon your demise. These include your provident fund, fixed deposits, mutual funds, and even your real estate.

Let＊s assume Kumar has a mutual fund portfolio of Rs 30 lakh. This money should be readily accessible to the family upon his demise (provided he has put them as nominees), so he can deduct this amount from his life insurance coverage requirements.

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