How Much Term Insurance Do I Need?

What is the Meaning of Term Insurance Coverage?

A term insurance plan offers financial protection to your family if you die during the policy period. The coverage amount, also known as the sum assured, is what your loved ones receive as death benefit. Choosing the right coverage is essential and is based on multiple factors .

Insufficient cover may leave your family struggling with debts, rent or EMIs. That's why finding the right balance is so important. Ask yourself simple questions like, "Will this cover take care of everyday expenses?" "What about my children's future needs or loans?"

For example, if Rahul, aged 35, earns ₹10 lakhs a year and has two school-going children, he may need a higher cover than someone in their early 20s without financial responsibilities. Understanding term insurance coverage helps you align your policy with real-life needs.

 

How Do I Calculate How Much Term Insurance Coverage I Need?

There are various methods that help calculate how much term insurance coverage one would require . The idea is simple: cover your income, expenses, and financial responsibilities. Let's look at five easy ways to find the correct coverage:

Here’s a look at some of the calculation methods that you can use to find the right term insurance amount –

 

1. The basic method

   This is one of the most commonly used and basic methods of calculating the term insurance amount. Under this method, the optimal sum assured is calculated as 10 to 12 times your annual income¹.

   
   

2. Underwriters’ Thumb Rule

   This method is also similar to the aforementioned method with a slight variation. In this method, the multiple of the income depends on your age. When you are young, the multiple is high and as you age, the multiple reduces¹.

   Here’s a look at the different multiples at the different age brackets¹ –

   Age bracket	Multiple of the annual income
   20 to 30 years	15
   31 to 40 years	14
   41 to 45 years	12
   46 to 50 years	10
   51 to 55 years	8
   56 years and above	6

   For instance, if an individual is aged 30 years with an annual income of Rs.10 lakhs, the right sum assured would be Rs.1.5 crores. On the other hand, if an individual is aged 35 years and has the same annual income of Rs.10 lakhs, the ideal sum assured would be Rs.1.4 crores.

   
   

3. Human Life Value (HLV)

   Another commonly used method to determine the right coverage is the HLV method. Under this method, the value of human life is estimated by considering the income that the individual generates¹.

   For instance, say an individual generates Rs.5 lakhs in annual income. This means that his family expects to get Rs.5 lakhs from him as long as he works. If the individual passes away prematurely, his family would lose this income of Rs.5 lakhs. Thus, the individual needs to make a provision to keep the income continuing even in his absence. If the risk-free rate of return is considered to be 6%, a corpus of Rs.83,33,333 can generate an annual income of Rs.5 lakhs. So, the right term insurance coverage would be Rs.83,33,333.

   You can use any of these methods to find out the coverage that you need. Alternatively, you can use term insurance calculators available online with most insurance companies to calculate the coverage needed. Enter a few details in the calculator and calculate the recommended coverage online in a few minutes.

   
   

4. Income Replacement

   This method looks at your yearly income and multiplies it by the number of years you expect to keep earning. For example, if you're 35 and plan to work till 60, that's 25 years. Multiply that by your salary, say ₹12 lakh, and the sum assured becomes ₹3 crore. That's the sum that you'd need to replace lost income in the absence of the bread winner of the family.

   
   

5. Expense Replacement

   Instead of income, this method focuses on what your family spends annually. Include household costs, children's fees, and lifestyle. Then multiply it by the years you want to cover. This makes sure your family maintains their standard of living even when income has stopped. This method focuses on living costs, not just income.

   
   

How Does Term Insurance Coverage Work?

Under a term insurance policy, you choose the –

1. Type of policy
2. Sum assured
3. Policy tenure
4. Premium paying tenure
5. Premium paying frequency
6. Optional riders or coverage options (if available)

Based on these choices, your age and other risk factors, the underwriting team determines the premium. You need to pay the premium over the chosen premium-paying tenure and in the chosen frequency and you get covered under the plan.

If the life assured passes away prematurely during the chosen policy tenure, the death benefit is paid. On the other hand, if the life assured happens to survive the entire policy term and the life insurance policy matures, there is no benefit paid. However, if you have chosen the return of premium term plan or if the return of premium option is chosen under the term plan (if available), the premiums paid over the policy tenure would be refunded.

This is how the term insurance coverage works.

 

How Much Term Insurance Coverage Do You Need?

Now let's go deeper into the question, "How much term life insurance should I have?" A suitable cover factors in more than just your income. It should account for your family's present and future financial expenses and liabilities ,life goals etc.

 

Account for Family Expenses

Think about how much your household spends every month, like groceries, utilities, school fees, and medical costs. Multiply that by the years you want to protect them.

 

Account for Outstanding Debts and Loans

Include any loans you're still paying: home, car, education or personal. Your insurance payout should be sufficient enough to cover this, so your family doesn't inherit unpaid dues.

 

Plan for Future Goals

Set aside an amount for goals like your child's higher education or marriage.

 

Provide for Spouse's Financial Needs

Your partner may need financial help for their health care, housing etc . Consider this when deciding on the sum assured.

 

Factors That Impact the Size of the Coverage

Now that you know how to decide the term insurance amount, know the factors that impact the size of coverage. Some such factors are as follows -

1. Age

   Under many calculation methods, the coverage depends on your age. If you are older, lower coverage is needed and vice versa. So, the age at which you buy the term insurance policy greatly affects the sum assured that you need.

   
   

2. Family expenses

   The higher the expenses the higher the coverage that you would need to provide your family with an optimal financial corpus to meet their expenses.

   
   

3. Riders

   Riders are optional coverage benefits that can be added to your base policy on payment on nominal additional premium. Riders have a separate sum assured and can help you determine the sum assured needed in your term plan.

   
   

4. Children's education

   If planning for your children’s higher education is one of your financial goals, you would need a higher corpus to fulfil this goal.

   
   

5. Term insurance premiums

   Term insurance premiums also affect the sum assured that you choose. The premiums depend on the coverage. If you choose a higher coverage the premiums would also be high and vice-versa. As such, it is important to assess if the premiums are affordable for the coverage selected. If higher coverage means unaffordable premiums, premium payments might become a financial strain and the coverage might lapse. As such, affordable premiums are important.

   
   

6. Important life goals

   Your life goals also determine the coverage needed. If you have multiple goals for which you would need funds, you need a high sum assured. On the other hand, if most of your goals are met, the requirement of the coverage reduces.

   
   

Things to Consider While Calculating Your Term Insurance Cover

Some of the things that should be considered when calculating your term insurance coverage are as follows –

 

1. Number of dependents

   If you have multiple dependents depending on you for their financial needs, you need a higher coverage level which would be optimal enough to cover their needs in your absence.

   
   

2. Inflation

   Inflation means a general rise in the price of goods and services. Inflation is a common phenomenon which increases your household expenses with each passing year. Moreover, the corpus needed for your financial goals also increases if you factor in inflation. Thus, your coverage should be sufficient to cover the inflated cost of living and financial goals.

   
   

3. Existing and prospective liabilities

   If you have existing liabilities, you would need additional coverage which can cover your liabilities when you are not around. Moreover, if your liabilities are expected to increase in the future, your coverage should be optimal to account for the expected liabilities too. For instance, if you have an existing car loan or personal loan, add them up to your sum-assured calculation. Moreover, if you might take a home loan in future, factor in the loan when calculating the sum assured.

   
   

4. Existing investments

   If you have savings and investments in Full Name, you can reduce their value from the required sum assured.

   
   

5. Existing coverage

   If you have bought life insurance policies, you can deduct their sum assured from your coverage requirement to find the exact coverage needed.

   
   

Conclusion

Don’t just buy a term life insurance policy. Buy a policy which has optimal coverage to provide complete financial security to your family in your absence. This would give you complete peace of mind and may help your family in their worst times. Do a complete fact-finding analysis when buying term insurance. Assess your existing expenses, liabilities, income, investments, assets, etc. and use any of the methods to calculate the right term insurance coverage.

 

FAQs

1. Should I consider my outstanding debts when calculating coverage needs?

   Yes, you should consider your outstanding debts when calculating your coverage needs. The outstanding debts are financial liabilities which should be added to the calculated sum assured to find the right coverage amount.

   
   

2. What is income replacement, and how does it factor into coverage calculations?

   Income replacement means replacing the income that the family loses if the life assured passes away. Income replacement is one of the methods of calculating term insurance coverage amounts. Under this method, you multiply the annual income of an individual with the expected years of active employment to get the ideal coverage amount.

   
   

   For instance, an individual earning Rs.25 lakhs every year aged 50 years and likely to retire at 65 years has an active working life of 15 years. If he passes away, his family would lose an aggregate income of Rs.3.75 crores (Rs.25 lakhs X 15 years). So, a coverage of Rs.3.75 crores is needed to replace the lost income.

   
   

3. How to determine the duration of term insurance?

   When determining the duration of term insurance, the longer the coverage the better. This is because term plans cover the risk of premature demise only during the chosen tenure. If the life assured passes away after the tenure has expired, no benefit is paid. Thus, it is better to choose a longer tenure so that the life assured is covered for a longer time.

   
   

   You can choose the whole life option which is offered with many term plans. Under this option, coverage is extended till 99 or 100 years of age so that you can get covered lifelong and enjoy maximum financial security.

   
   

4. At what age should one buy term insurance?

   The earlier, the better. Buying in your 20s or early 30s may get you lower premiums and a better coverage.

   
   

5. What is excluded under term insurance cover?

   Most term plans don't cover deaths from suicide in the first year, or deaths due to hazardous activities, under the influence of alcohol, etc . This might differ insurer to insurer and policy to policy. Always read the exclusions carefully before buying your policy.

   
   

6. How much insurance does a 35-year-old need?

   It depends on factors like income, loans and dependents. The coverage should be enough to replace the person's income, clear any debts, and support the family's future expenses and lifestyle.