Life insurance – Calculate your Expected Term Insurance Coverage Requirement

If you are the sole breadwinner of your family or have someone dependent on you financially, the thought of getting life insurance must have occurred to you. After all, you can never predict which curve ball life will throw at you next, and it is critical to always stay prepared.

Moreover, the COVID-19 pandemic has truly driven home the point as the need to buy life insurance has grown considerably. So, if you are considering getting term insurance, keep reading.

Parameters to consider

Some of the parameters to consider before you select your life insurance cover include:

• Age

Your age when buying life insurance is a significant parameter that can determine the amount you require. This is because, at different life stages, your financial liabilities can change drastically.

• Income level

Naturally, your income level is a critical aspect in determining how much insurance you can afford. After buying the insurance, you should pay the premium regularly to keep the policy in force. Thus, your income should support the expense, and the coverage should be enough to support your family.

• Financial goals

As you know, fulfilling life goals like buying a house or sponsoring your child’s education requires adequate financial assistance. And when buying life insurance, you must ensure that these goals are fulfilled even after your unexpected demise.

Additional Read: The relevance of insurance in your financial plan

How to calculate expected term insurance coverage

There are multiple methods to calculate how much life insurance coverage you require. Here are the 4 most effective strategies:

Human life value

According to this method, the life insurance coverage you need is based on your economic value to your family. Simply put, the amount of income that they can expect you to earn in the future. The inflation rate is also considered in this method, and it is a common strategy used by insurance companies. In fact, you can use a human life value calculator online to calculate the amount in seconds.

Income replacement value

This method concentrates on replacing your lost income after your demise so that your family can continue the same lifestyle that they follow currently. The most straightforward way to calculate the income replacement value is:

Current annual income X number of years left for retirement.

Expense replacement

As the term suggests, this approach considers your daily expenses, outstanding loans, and the critical milestones in your family like wedding, retirement and your child’s education. Next, you deduct the existing investments such as mutual funds and assets to get the amount of life insurance coverage required.

Many experts recommend this method as it can give you an accurate picture of the insurance coverage amount that can cover your expenses.

Additional Read: All You Need to Know about Different Types of Insurance and Their Uses

Underwriter’s thumb rule

According to the Underwriter’s thumb rule method, your life insurance coverage must be 10 times your annual income. So, for example, if your annual income is Rs 10 lakhs, you should have a life cover of at least Rs 1 crore.

However, many investment advisors don’t entirely agree with this approach and suggest that your insurance cover be 15-20 times your annual income.

Parting words

The amount of life insurance you need differs from person to person and can even change with your age and lifestyle. To manage your investments and insurance needs from the comfort of your home, download the Moneyfy app by Tata Capital. You can do thorough research and pick the ideal investment products based on your lifestyle and goals!