March 1, 2024
Term Insurance
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Term insurance is an important decision that will determine many of your financial decisions in the future. It is an investment of a permanent nature that demands periodic payments in the form of premiums. Calculating your term insurance coverage amount is an essential step for everyone.

If you observe keenly, you will notice that the premium of the term insurance changes with the coverage. This is because your term insurance coverage is a determining factor that influences the premium of your policy.

Apart from that, coverage is important at the time of maturity of your policy. Buying term insurance is important, and verifying your willingness to spend on the premium is necessary, too. Nowadays, with online tools like a term insurance calculator, it has become easier to calculate the premium beforehand. That way, you can be on the safer side of the road.

So, considering everything, let us discuss how you can calculate your insurance coverage amount.

Term Insurance Coverage Calculation Methods

  • Expense Replacement Method (Yearly Expenses)

Your yearly expenses dictate a lot of your life and financial decisions. It is also advised by a financial professional that you should consider 10 to 15 times your annual expenses.

This is called the expense replacement method, which helps you calculate the coverage by replacing your annual expenses. 10-15 times your annual expenses will make a sufficient amount and that can support your family for enough timespan.

  • Income Replacement Method (Yearly Income)

Your yearly income is your capacity for expenses. Your willingness to spend on something determines how much you can and want to pay for the policy premium. It is advised by financial consultants that you should calculate the coverage amount like this:

Coverage amount = Annual Income X Years Left Before Retirement.

This allows you to safeguard your family with the amount of your income.

  • Liabilities Method

Liabilities and loans are a huge part of your lives. In case of an unfortunate incident of the policyholder’s death, the family members shouldn’t be burdened by the liabilities. To avoid that, you can consider your liabilities and determine your coverage accordingly.

  • Financial and Family Goals

Family and finances go hand-in-hand. Your partner, parents, and children are your responsibility, and this responsibility demands financial planning. The cost of your children’s higher education and plans for your partner’s healthcare should be included in your term coverage amount. The amount that is equal to these costs should be your term insurance coverage.

  • Underwriter’s Rule Method

The underwriter’s rule says that you should calculate your term insurance coverage like this:

Term Insurance Coverage Amount = Annual Income X 10

  • Human Life Value Method

When it comes to the human life value method, you can calculate it as mentioned below in an example. The total term insurance coverage amount will be:

Factors Amount (In ₹)
Future Monthly Expenses (+) [Utility bills, fees, medicine, household expenses] 1,26,00,000
Future Liabilities (+) [Home loans, car loans, education loan] 60,00,000
Future Financial and Family Goals (+) [Child’s Higher Education, Their Marriage] 30,00,000
Miscellaneous Expenses (+) [Spouses retirement corpus] 80,00,000
Investments (-) [Mutual Funds, Shares, Gold] 30,00,000
Total Term Insurance Policy Coverage (=) 2,66,00,000

There are always other ways to calculate the term insurance coverage!

Bottomline

Knowing these basic concepts and calculations helps you understand the entire process of term insurance purchase. Understanding the insurance policy, your financial goals, estimated needs, and investments, children’s education, future contingencies, etc., are necessary parts of your financial planning. Make good plans and decisions for yourself.

Frequently Asked Questions (FAQs)

  1. What is the meaning of term insurance policy coverage?

Term insurance policy coverage is the amount assured by the insurance company at the end of the policy. Once the policy matures, that is, if the policyholder unfortunately dies in the term timespan, the insurance company will pay the said amount to the policyholder. Companies offer plans like 50 lakhs term insurance, 1 crore term insurance, 2 crore term insurance, etc. to cater to your needs.

  1. Does the policyholder receive the money in case the individual doesn’t die?

Insurance companies usually pay the assured sum only in case the policyholder dies during the timespan mentioned in the term insurance policy. Apart from that, the policyholder does not receive any amount.

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