Pune, 10th February 2024: Retirement is a critical stage of life that necessitates financial planning in advance. Over the years, it has gained popularity as people seek financial independence and stability in their post-career years. A crucial question that frequently arises is what should be the ideal term insurance coverage you should choose now that can take care of your family even after your unfortunate demise.
While one can use a term insurance calculator to understand the amount of coverage, the figure of Rs. 1.5 Crore term insurance has grown in popularity. It is so commonly used that individuals have begun to associate term insurance with this eight-digit value since they are mentally comfortable with it. Its popularity stems from the fact that you can purchase such a large cover and financially protect your family without breaking the bank.
But it is Rs. Is 1.5 crore term insurance really enough? Will this amount be sufficient to meet your family’s requirements in your absence? Read on to understand the same.
Will it be enough, or should I increase it?
Firstly, one has to understand that the Rs. 1.5 crore term insurance amount should not be used as a benchmark figure. There is no reason to follow this number blindly without taking into account various considerations. It might be sufficient in one person’s case but not in another. You can only reach a decision after considering your future commitments to your family members.
What if your home loan and other big expenses, such as your children’s schooling, marriage, and partner’s retirement, exceed this amount? In such a situation, the alleged ‘benchmark figure’ will likewise fall short. Whenever in doubt, you can easily loop in an insurance expert or use a term insurance calculator to reach that amount.
What Should be the amount of Term Insurance Coverage I should go for?
Many people recommend that you obtain term insurance for 15 to 20 times your yearly pay, known as the “basic thumb rule,” but this is not a one-size-fits-all solution. The threshold could be Rs. 50 lakhs, Rs. 1 crore, Rs. 2 crore, etc. It varies from individual to individual based on earnings, dependents, and long-term financial aspirations.
To make this decision for you, there are easy and definite methods for estimating the required term life cover. Here are two different methods:
Method #1: Consider your existing lifestyle and annual expenditures first. When determining the annual spending, you must add your monthly utility bills, grocery and medical expenses, entertainment and vacation expenses, etc. You should also consider your existing loans, the number of years your dependents will require a monthly income and any other large expenses you have planned for the future, such as your child’s higher education or marriage. Then, deduct your savings from the total amount to get the life insurance coverage amount. Discuss with your family your future financial responsibilities and debts, such as your child’s schooling and marriage, asset purchases, and so on. When making this estimate, consider the inflation rate and choose the most approximate financial amount for your family’s future. Subtract the total savings fund from this figure to get the life insurance amount that will protect your family’s future in your absence.
Based on the aforementioned computation, here is a formula:
Term Insurance Coverage Amount = [Family’s Lifelong Expenses (annual expenses factoring inflation till your retirement age) + Expenses for Future Goals + Loans/Debts] – Savings
Based on this figure, you can calculate the required sum assured and evaluate whether 1.5 crore term nsurance is sufficient.
Assume your current household expenses are Rs. 60,000 per month in 2019. Hypothetically speaking, add 8% inflation, and that will raise that figure to Rs. 80,000 per month in five years. In ten years, monthly family spending will exceed one lakh. When purchasing a term insurance plan, you must consider the increase in living expenditures.
Method #2: Another basic thumb rule approach will depend on your age.
If you plan to acquire term insurance between the ages of 20 & 30, you can estimate your life cover to be 20 times your annual salary.
If you want to buy it between the ages of 30 and 40, it may cost 15-20 times your present annual income.
If you are over the age of 40, the purchase price should be at least ten times your annual salary.
Important Note: Review your term insurance at 5-year intervals to ensure that it is sufficient.
A home loan, marriage, childbirth, and other events may increase your financial liabilities. All of these can increase your requirements. As your financial responsibilities increase, it is critical to review your term insurance coverage every 4 to 5 years. This ensures that your term insurance coverage is sufficient to satisfy your family’s needs in the future, even if you are not present.
How do I choose the best term insurance coverage?
Choosing a term insurance policy is an important life choice that one should make. The following are some tips for selecting the best life insurance coverage:
Use term insurance calculator: Before purchasing any term insurance policy, use an online term insurance calculator to calculate the premium required for a specified life cover. It is simple to use, and you can see how the premium varies depending on the sum assured, policy period, payment modes, and payment terms.
Buy life insurance online: Many advantages of buying life insurance online include the ability to compare different policies, affordable prices, and a speedy process. You can buy the policy without leaving your house or office, eliminating the need to contact a local agent or an insurer’s branch office.
So, we are saying,
So, if you’re thinking about buying term insurance and aren’t sure how much coverage you need, don’t worry. Instead of relying just on the Rs. 1.5 crore number, either use the term insurance calculator or the method outlined above to find an appropriate term insurance plan that can meet your family’s future demands.