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4 Methods to Calculate How Much Term Insurance You Need

Human life value (HLV), income replacement value, analysis of needs, and underwriter’s thumb rule are 4 ways through which you can calculate term insurance coverage.

  • Nov 30, 2021

Purchasing term insurance is one of the best ways by which you can protect your family’s future. In term insurance, your family or beneficiary will get the lump sum death benefit amount as payout in case something were to happen to you. Now this is an amount that is pre-decided when you purchase your term insurance. You have to decide how much life cover would be sufficient to take care of all the financial needs of your family in the future.

This may seem like a straightforward task, but calculating the coverage amount may be tricky, as you never know how far into the future your family would need the money and what the value of the given amount would be at that time. To make things easier, you have a few ways using which you can calculate the amount of term insurance you need.

Let us look at four different methods to calculate how much term insurance you need.

Method 1: Human Life Value (HLV)

The Human Life Value is a number that tells you what your total economic worth is as an individual. It basically tells you the present value of all future incomes, earnings, investments after deducting all future expenses and liabilities. It is a number that represents how much funds you create for the people who are dependent on you. So, if your life was cut short unfortunately, the amount you would have for your family would be absent and that would be how much you require for your term insurance. This is nothing but the Human Life Value and is a good way to measure how much term insurance you need.

Method 2: Income Replacement Value

This is a much simpler method of calculating term insurance. It is based on your annual income now and how many years you have left until retirement.

Term insurance coverage required = Current Annual Income x No. of years left until retirement

For example, if your annual income is Rs. 5 lakh and you plan to work for another 20 years, then the term insurance you require would be Rs. 1 crore.

Method 3: Analysis of Needs

The third method of calculating term insurance requirement is a much more elaborate one but also one which may give the most accurate result. In this method, your family’s total expenses are calculated right from the present day to the life expectancy of the youngest member of the family. The following factors are considered in this calculation:

- Number of dependents and their requirements

- Liabilities like loan EMIs

- Children’s education and marriage expenses

- Standard of living that you want for your family

- Other special requirements

After summing up all of the above, you’d get the total amount required. You then have to deduct your assets from the figure and the resulting number would be the term insurance cover you need.

Method 4: Underwriter’s Thumb Rule

This is yet another way to get a rough approximation of term insurance cover. It uses multiples of your annual income to arrive at a figure. For example, For individuals aged between 30 and 40 years, the term insurance should be 25 times their annual income. Similarly, for people aged between 40-50 years, the term insurance should be 20 times their annual income.

In this way, you can use the above four methods to calculate your term insurance cover. Do note that all of these methods result in figures that are an approximation at best. Everything like the number of dependents, standard of living, expected inflation in the future etc can change the term insurance you need, so consider all these things carefully.

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


- A Consumer Education Initiative series by Kotak Life

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