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How Much Term Insurance Coverage Do I Need?

Term insurance offers high coverage amounts at relatively low premiums, especially when you are young and healthy

  • 11,987 Views
Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

Determining the right amount depends on several personal factors, and it is important to consider each one carefully before making a decision. The amount of coverage depends on factors like your financial situation, income, lifestyle, and your future goals.

Having a term insurance plan can be incredibly important for many reasons, especially if you have dependents or financial responsibilities. If you pass away unexpectedly, your loved ones could lose your income, making it difficult to cover basic living expenses, debts, or future goals. Term insurance provides a lump sum payout that can help bridge this financial gap and ensure their stability.

What is a Term Insurance Plan?

Term insurance covers are pure life insurance plans that provide optimum coverage at a minimal cost. If the insured dies within the policy term, the insurance company pays the sum assured to the family.

Hence, the sum assured should suffice the financial needs of the policyholder’s family and should be in sync with the current and future living standards. Therefore, the term cover amount should not rely only on the insurer’s income; instead, you must decide the amount based on your family’s financial goals. 

How Much Term Insurance Cover Do I Need?

Deciding on the amount of coverage involves considering factors that affect your insurance plan. Consider the below-listed factors that would make it easier to decide how much term insurance amount would suffice for your family:

Your Current Income

Most experts advise that a term insurance cover should be nearly 15 to 20 times an insurer’s annual income. For example, if the yearly income is ₹10 lakhs, the term cover should be between ₹1.5 crore to ₹2 Crores. However, this advice should be taken with a pinch of salt. While it can help you zero in on the minimum cover, you may need more or lesser coverage depending on other factors, as mentioned below.

Your Age

Age is crucial as it indicates the enormity of your responsibilities. When you are young and just starting your career, you may not have too many responsibilities. However, you are more likely to shoulder more responsibilities as you age. Thus, you may need higher coverage with growing responsibilities.

Your Financial Liabilities and Assets

If the insurance holder dies early, the coverage should be enough to accommodate the installments of the current debts and loans. It would help if you also considered the market value of the financial assets as they will help in nullifying the liabilities or helping meet the financial goals. 

Your Financial Goals

The objective of buying a term insurance plan is to comfortably meet the financial goals of the insurer’s family, in tandem with maintaining the living standards. Consider a few financial objectives that may impact the coverage you will need-

  • Child’s higher education
  • Upcoming wedding expenses in the family
  • Building a retirement corpus
  • Buying a home

Premium You Can Afford

This is an essential factor as premiums should fit in easily in the insurer’s disposable income bracket. A higher term cover amount may seem enticing, but a very high premium may result in payment defaults and policy lapses. Most experts advise that a term insurance cover should be nearly 15 to 20 times an insurer’s annual income.

What are the Benefits of Having a High Coverage Amount?

Having a high coverage amount in your term insurance plan can offer several potential benefits, but it is important to weigh them against potential drawbacks and ensure they align with your specific needs. Here are some key points to consider:

Greater Financial Security for Your Loved Ones

A larger payout can better cover outstanding debts, living expenses, education costs, and other financial needs your dependents might face after your passing. This can provide more peace of mind and stability for them during a difficult time.

Flexibility for Future Needs

Life circumstances can change. With a higher coverage amount, you have more flexibility to handle unexpected expenses or changes in your dependents’ plans, like additional education or a career shift.

Potential for Lower Premiums Later

Some term insurance plans offer “level-term” options where your premium stays the same even if your age or health status changes. Locking in a high coverage amount early can be cheaper than purchasing additional coverage later in life when premiums would likely be higher.

Estate Planning Benefits

In some cases, the death benefit from term insurance can be used to reduce estate taxes or create trusts for beneficiaries. However, consulting with a financial advisor is crucial to understand the specifics and tax implications.

Tips to Choose Life Insurance Coverage

Choosing a life insurance policy is a critical life decision. However, it is not the only factor to consider while selecting life insurance. The following are some suggestions for choosing the best life insurance coverage:

Consider Your Budget

Term insurance offers high coverage at affordable premiums, but choose a plan you can comfortably maintain without straining your finances.

Compare Different Plans and Providers

Do not settle for the first option. Research and compare quotes from different companies to find the best coverage at a competitive price.

Consider Riders

Riders are optional add-ons that can enhance your coverage, like disability income or accidental death benefits. Choose riders that complement your specific needs.

Calculate Human Life Value (HLV)

Human Life Value (HLV) estimates the financial impact your life has on others today, considering potential future earnings, expenses, debts, and assets. It calculates how much your loved ones would need financially if you were no longer around. By knowing your HLV, you can get a clearer picture of the ideal amount of term insurance coverage needed to protect your family’s future well-being.

Review Your Policy Regularly

Always update your coverage as your needs and circumstances change. Also, consider cost-of-living adjustments to maintain adequate coverage.

Wrapping it Up

The benefits of opting for a higher coverage amount are substantial. Beyond providing greater financial security for your loved ones, it offers flexibility for unforeseen circumstances and potential savings on premiums in the long run. However, the decision of whether a high coverage amount is right for you depends on your unique financial situation and goals. Weigh the potential benefits and drawbacks carefully before making a decision.

Key Takeaways

  • Current income is a key factor for deciding insurance coverage, with experts recommending coverage of 15 to 20 times the annual income.
  • Locking in a high coverage amount early may result in lower premiums and can accommodate future needs.
  • Knowing your Human Life Value (HLV) helps determine the ideal amount of term insurance coverage needed for your family’s well-being.
  • Financial goals such as a child’s education, wedding expenses, retirement, and home buying affect coverage decisions.

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Ref. No. KLI/22-23/E-BB/2435

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- A Consumer Education Initiative series by Kotak Life