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Features
Ref. No. KLI/22-23/E-BB/492
A key factor when buying term insurance begins with the question: How much term insurance do I need to provide financial stability for my family? Term insurance offers flexible coverage, but selecting the right sum assured is important. Many people choose term plans for their affordability but may not calculate the right coverage amount. Ideally, your sum assured should be at least 10-12 times your annual income to help your family manage expenses and inflation. Before making a decision, it's essential to understand what term insurance coverage means and how it ensures financial security.
Term insurance coverage refers to the sum assured that is paid to the nominee in case of the policyholder’s untimely demise within the policy term. This coverage ensures financial stability for your family and may include additional rider benefits, such as an accidental death benefit, which increases the payout.
When selecting a term plan, it’s important to determine how much insurance do I need to cover my family’s expenses, including daily costs, outstanding loans, and future financial goals. To choose the best coverage, ask yourself - how much term plan should I take to maintain my family’s lifestyle and provide them with long-term security.
Term insurance coverage is a financial safety net that provides a lump sum payout to your nominee if you pass away during the policy term. When you purchase a term plan, you choose a coverage amount, known as the sum assured, which will be paid to your nominee if something happens to you. This lump sum amount can help your loved ones cover daily expenses, clear debts, and meet long-term financial goals.
To better understand how term insurance coverage works, let’s take an example:
Suppose you are 25 years old with an annual income of ₹12 Lakhs. To ensure your family’s financial stability in your absence, you should consider a sum assured that is about 15 to 20 times your annual salary. This means you might opt for coverage of ₹2.4 to 3 Crores. In case of an unfortunate demise during the policy term, your family will receive this amount as a death benefit, helping them manage expenses, debts, and future goals.
Additionally, if you choose to add riders, such as an accidental death benefit, your loved ones may receive an extra payout. This ensures greater financial protection, depending on the riders selected. While determining how much term insurance do I need, it’s necessary to consider future inflation, liabilities, and long-term financial security for your dependents.
Determining the right amount of coverage is crucial to ensure that your family’s financial needs are adequately met in the event of an unforeseen tragedy. Explore various methods used to calculate the ideal term insurance cover, empowering you to make informed decisions about your financial future.
The Human Life Value(HLV) method calculates the ideal term insurance cover based on an individual’s earning potential and future financial obligations. It considers factors such as age, income, expenses, outstanding debts, and future financial goals to determine the present value of the individual’s earning capacity over their remaining working years. By accounting for lost income and future expenses, the HLV method provides a comprehensive estimate of the amount of coverage needed to safeguard one’s family’s financial well-being.
The Income Replacement method focuses on replacing the insured individual’s income for a specified period, typically until retirement age. It calculates the ideal term insurance cover by multiplying the individual’s annual income by the number of years until retirement. This method ensures that the insured’s family can maintain their standard of living and meet ongoing financial obligations, such as mortgage payments, education expenses, and daily living expenses, in the event of premature death.
The Expense Replacement method calculates the ideal term insurance cover by estimating the insured individual’s future financial obligations and expenses. It considers factors such as outstanding debts, mortgage payments, education expenses, healthcare costs, and funeral expenses to determine the amount of coverage needed to cover these expenses adequately. By focusing on replacing specific expenses rather than income, this method provides a tailored approach to determining the right amount of coverage for the insured’s family.
The Underwriter’s Rule method, also known as the Multiple of Income method, simplifies the process of calculating the ideal term insurance cover by applying a predetermined multiplier to the insured individual’s annual income. Typically, insurers use a multiplier between five to ten times the individual’s annual income to determine the coverage amount. While this method provides a quick and straightforward estimate of the required coverage, it may not account for individual circumstances and financial needs comprehensively.
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:
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.
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.
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 nullify the liabilities or meet the 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-
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.
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:
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 them with more peace of mind and stability during difficult times.
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.
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.
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.
Choosing a life insurance plan 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:
Term insurance offers high coverage at affordable premiums, but choose a plan you can comfortably maintain without straining your finances.
Do not settle for the first option. Research and compare quotes from different companies to find the best coverage at a competitive price.
Riders are optional add-ons that can enhance your coverage, like disability income or accidental death benefits. Choose riders that complement your specific needs.
Buying term insurance online offers convenience, choice, and transparency, allowing you to research, compare, and purchase policies from the comfort of your own home. Consider factors such as coverage amount, term length, and premium affordability when choosing a term insurance plan online.
Always update your coverage as your needs and circumstances change. Also, cost-of-living adjustments should be considered to maintain adequate coverage.
Answering the query - “How much term insurance do I need?” requires careful evaluation of your financial obligations, income, expenses, and long-term goals. By analyzing these factors and consulting with a financial advisor, you can choose the right coverage to ensure your loved ones remain economically stable in your absence. Remember, term insurance is not a one-size-fits-all remedy, so it’s best to tailor your coverage based on your unique financial situation. With the appropriate coverage in place, you can remain in peace knowing that your family will have the financial support they need when it matters most.
1
You can typically include your spouse and dependent children under your term insurance plan, but the number of family members covered may vary depending on the insurer and the specific policy terms.
2
Yes, individuals with a history of medical conditions or lifestyle factors that pose higher risks may be required to pay higher premiums for term insurance coverage. Insurers assess applicants’ medical histories during underwriting to determine their risk profiles.
3
It is advisable to buy term insurance at a young age, ideally in your 20s or 30s, when you are healthy, and premiums are more affordable. However, it is never too late to purchase term insurance, and coverage can still be obtained at older ages, albeit at higher premiums.
4
The thumb rule for term insurance is to have coverage that is at least 10 to 15 times your annual income. This ensures that your family will receive adequate financial protection to maintain their standard of living in the event of your untimely passing.
5
Common exclusions under term insurance cover may include death due to pre-existing medical conditions, suicide within the policy’s initial years, death resulting from participation in hazardous activities or illegal acts, and death due to war or acts of terrorism. It’s essential to review the policy terms carefully to understand exclusions.
6
The amount of term insurance coverage needed in India varies depending on factors such as your income, financial obligations, lifestyle, and family’s future needs. A general guideline is to have coverage that is at least 10 to 15 times your annual income, but it’s advisable to assess your specific needs with the help of a financial advisor.
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.
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
Features
Ref. No. KLI/22-23/E-BB/2435
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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