However, simply purchasing life insurance is not enough. The objective is to have a substantial sum assured to cover the needs of your family. But how much is enough? Insurance protects you against the unexpected passing of the breadwinner, ensuring that the family’s future living expenses or ambitions are not affected. The cover is not based on current income but on the future worth of the goals you have set for your family.
We look at four approaches for calculating how much term insurance you need: human life value, income replacement value, expense replacement method, and the underwriter’s thumb rule.
What does “sum assured” mean in term insurance?
The sum assured is the specified amount of money that the insurance company promises to pay to the policyholder’s beneficiaries in the event of the insured’s death within the policy period. It is essentially the financial security that the coverage gives. For instance, if you have a term insurance policy with a sum assured term plan for 1 crore, your beneficiaries will receive the same amount if you pass away within the policy period.
Human life’s value: This approach takes into account a person’s economic or human life value (HLV) to his or her family. This idea focuses on the value of future income, expenses, liabilities, and assets. The HLV technique requires you to examine your income, expenses, anticipated future responsibilities, and goals when determining your insurance needs. Experts recommended this approach since it provides more transparency while accounting for inflation. If your goal is to maintain your family’s current lifestyle in the future, calculate the cost in today’s rupee value. This will help you decide how much coverage of the term plan you should have for 1 crore or some other amount.
Income Replacement: This strategy assumes that term insurance should replace the breadwinner’s lost earnings. One of the simplest ways to calculate your income replacement value is to use the formula insurance cover = current yearly income x number of years till retirement. For example, if you are 40 years old, have an annual salary of ₹15 lakh, and aim to retire at the age of 60, you will require ₹3 crore (₹15 lakh x 20). One of the disadvantages of this strategy is that it can suggest a very high cover by taking into account future income, and hence, you can take a term plan for 1 crore for safety.
Expense Replacement: According to this strategy, which is advised by financial advisors, individuals must calculate their daily family expenses, debts, and plans such as children’s education, as well as provide for financially dependent parents for the rest of their lives. The value you arrive at is the overall amount of money required by your family.
The next step is to deduct the present value of your existing investments and term insurance policies. When assessing the worth of your investments, minimise things like your home and car because your family members will probably continue to use them. The figure obtained by subtracting investments and insurance coverage from expenses and goals will give you an indication of how much coverage you require. Experts suggest the expense replacement method, as it gives a more accurate picture of the insurance coverage amount and covers the expenses of the survivors till the insured’s life expectancy.
Underwriter’s Rule: To calculate the minimum coverage you require, use the typical thumb rule of having a sum assured that is ten times your yearly salary. If your annual salary is ₹10 lakh, you should have a term insurance of at least a term plan for 1 crore. However, according to investment advisers, this strategy does not provide an accurate picture. Most insurance firms recommend insurance coverage of ten times your annual income. That is why it has become a rule. The minimum coverage should be at least 15-20 times your annual income. Insurance companies also offer coverage for 25 times your annual salary.
It’s possible that your current coverage of, for example, a term plan for 1 crore appears insufficient because the value of your life is increasing, the value of your goals has increased, or the goals themselves have changed. If this is the case, think about improving your coverage or purchasing a new policy. However, if your life insurance company does not provide this feature, you may want to consider purchasing a second policy.
So we are saying,
It makes sense to compare premium plans of term plan for 1 crore based on your needs. Seek professional advice to evaluate the policy type and coverage that will best suit your budget and your family’s financial needs. It is essential to carefully choose a term insurance policy because your decision will have an important effect on the nominee’s life. Furthermore, you must pay attention to adding the correct riders, as they can assist you in times of need.
