Term insurance: How much coverage do you need?

Santosh Agarwal

We all must agree on one fact that an unexpected, yet, very important lesson that the ongoing COVID-19 pandemic has taught us all – the future only belongs to those who stay prepared for it. And amidst a situation like this, you cannot think of any better way to stay financially protected than investing in a comprehensive term life insurance plan. Your term life insurance policy helps you to safeguard the financial future of your loved ones when you are not around to protect them. A term insurance plan helps your financial dependents to continue living a life of dignity in case of your sudden demise.

Know your actual value

Apart from investing in a term life insurance plan, as an individual who helms the responsibility for your family's financial future, it is equally important for you to buy a life insurance cover with right sum assured. This amount should be sufficient to financially shield your dependents from life's numerous uncertainties. You would never want your family to run short of funds for major life milestones such as education of your kids, their marriage, daily expenses and retirement needs of your spouse. This is why it is always advisable to calculate your “Actual Value” while investing in a term plan. This will help you build the right corpus to take care of every financial need of your family during your absence.

You recognize and calculate your actual value at the time/age at which you plan to buy the policy. It is important to have an understanding of your real value as it is the key element for a financially secure future. Usually, most people assess their worth on the basis of the financial support that they bring to the house, often overlooking the liabilities that they carry at the same time. With this unintentional step, they risk their family's future financial stability.

Importance of human life value concept

While calculating the sum assured for your term life insurance plan, it is very important to take into consideration the concept of Human Life Value (HLV). Generally, the Human Life Value is the present value of all future income that you could expect to earn for your family until your retirement. It is the best indicator of how much economic loss your family would suffer in case of your early demise. HLV also takes into consideration your expenses, savings and liabilities to calculate the right sum assured for your term life cover.

By calculating the Human Life Value in the right manner, you can help your dependents maintain the same living standard, pay outstanding loans and fulfil their long-term goals such as child’s higher education and marriage. The factors that need to be taken into consideration while calculating the right Human Life Value include your current age and when you wish to retire, your monthly expenses, outstanding loans, possible future expenses and current savings.

Calculating the right sum assured

It is crucial for you to recognize how important you are for your family’s well-being, through life's ups and downs. A right understanding of your own actual value is directly proportional to the level of financial protection your dependents would require in your absence and it is therefore important to understand and calculate your actual value in the right manner. In order to assess your right financial value, it is important to consider certain aspects before making a final decision on the sum assured needed. The most important thing you need to do is gauge the extent of your current protection need and determine the right amount of life cover required.

Assess your family’s needs, the financial requirements of your loved ones, your current savings, your existing liabilities such as home/car loan etc. You must also take into consideration important aspects such as an increase in annual income, change in expenses related to lifestyle spending and extra financial liabilities.

It is suggested that the sum assured of your term life insurance plan should be calculated as per your current age. A salaried individual up to the age of 40 years must always go for a term plan with sum assured of 20 times their annual income. Further, individuals above the age of 40 years must go for a sum assured 10-15 times their annual income and those in their 50s must opt for term insurance with sum assured of 5-10 times their annual income. Your sum assured can also be 12-15 times of your family’s annual expenses.

(The writer is CBO-Life Insurance, Policybazaar.com)