How much term insurance cover should you buy?

1. How much term insurance cover should youbuy? A term insurance policy provides a source of income for the family if the bread-winner is not around. The plan covers the risk of premature death. If the breadwinner of the family invests in a term insurance plan and then dies prematurely, the policy pays the family a death benefit. This death benefit gives the family financial assistance so that they can meet their financial needs even when the bread-winner is not around. Term plans, therefore, are a must for every individual if they want to provide for their family in theirabsence. The importance of a term insurance plan can be felt only when the sum assured of the policy is optimal enough to cover all the financial needs of the family sufficiently. Even when you buy the best term insurance plan, the policy might fail to provide complete financial security to your family if you have not chosen the ideal coverage level. So, choosing the right coverage is essential. Do you know how? There are different ways of calculating the right level of sum assured which should be chosen when you buy an online term plan. Let’s understand what these ways are– 1. Basic thumbrule This rule is a ready reckoner if you don’t want to indulge in complicated calculations. The thumb rule states that the sum assured should be at least 10 to 12 times your annual income. So, if your annual income is INR 10 lakhs, the sum assured should be INR 1 crore to INR 1.2 crores to ensure optimal coverage for yourfamily. 2. Underwriter’s thumbrule This rule is also similar to the above-mentioned rule. However, here, the multiple of income depends on your age. Under this method, if your age is between 20 and 30 years, the sum assured should be 15 times your annual income. For ages 31 to 40 years, the multiple should be 14. If your age is between 41 and 45 years, the sum assured should be 12 times your annual income and if it is between 46 and 50 years, it should be 10 times your annual income. For older ages, the multiple reduces. For ages between 51 and 55 years the multiple is 8 and for 56 years and above it is 6 times the annual income. 3. Human Life Valuemethod Also called the HLV method in short, this is a popular mode of determining the sum assured and it involves some calculations. Under this method, the financial value of human life is calculated based on your income earning capacity. Let’s understand this calculation with an example. Suppose you earn INR 50,000 every month out of which you incur INR 20,000 in expenses. Thus, you contribute INR 30,000 to your family as your disposable income. In your absence, your family would need a corpus which would give them INR 30,000 every month, or INR 3.60 lakhs every year, as interest so that they can lead their lives undisturbed. Ignoring inflation, suppose the interest rate of fixed income instruments is 6%, your family would need a corpus of INR 60 lakhs which would give them INR 3.6 lakhs in interest every year. So, INR 60 lakhs would be your Human Life Value and the sum assured which you should optfor.

2. 4. Need analysismethod This is a more practical method of determining the sum assured that you need. Under this method, your existing assets and liabilities are taken into consideration to arrive at the corpus which would be needed for your family’s financial needs. The calculations are a bit complex as the value of assets and liabilities are considered. Moreover, inflation is also considered in the calculation to get a more realisticresult. When you buy an online term plan, you need to be careful in choosing the sum assured of the policy. Use any of the above-mentioned ways to find the most suitable sum assured for your needs. You should also review your policy periodically to assess the sufficiency of the sum assured as your responsibilities increase. When the sum assured is optimal, your policy would surely prove to be the best term insurance plan which would provide optimal financial security to your family. So, choose the sum assured with consideration for creating a secured financial net for your family in your absence.