How Much Term Insurance Do You NeeEEEd?How Much Term Insurance Do You Need?How Much Term Insurance Do You Need?
How Much Term Insurance Do You Need?
As discussed above, you need to be sure about the sum assured to be able to determine the premium amount. We also discussed that it would be a challenging task for you to decide on a suitable coverage so many years in advance. More so, because of rising inflation. So, now, the question is, “How much term insurance do you need?” Here are some factors that you have to consider while deciding on your sum assured.
Current income and expenses
Your existing income and expenditures determine the remaining balance and the amount that you can contribute towards premium payment from this balance. Consider the regular monthly expenses like utility bills, groceries, payment of medical insurance premium, expenses for the dependents in your family like children, spouse and parents. Also, take into account miscellaneous expenditures for entertainment and gifts, etc.
However, remember that your expenses will not stay constant till the maturity of your term policy as a result of inflation. Add up all these monthly expenses to get a clear idea of the outstanding balance from your monthly income. Your monthly income does not only imply your primary source of income, i.e. salary from your profession or business profits. This is one of the major determining factor based on which you can decide on the premium amount that you would be able to contribute towards a term insurance policy every month.
Current and future assets and liabilities
Consider your loan instalments (personal loan, home loan, car loan) and EMIs that you may have opted for. Your monthly assets and liabilities also include your disposable investments in fixed deposits, ULIPs, ELSS, capital market, gold, etc. These expenses too will not remain constant. With your annual monthly increment through the years, your investments will also probably increase. Leave scope for such investments.
Future financial objective for family and self
Along with future investments in assets and liabilities, every individual has different financial objectives for the future. These may be your child’s marriage or higher education or you might plan to pursue a higher education course to add to your present qualifications, retirement plans, etc. Your expenses throughout the years are bound to vary. Therefore, you need to review your sum assured and premium payable regularly and adjust them according to your goals and convenience.
Utilise the Human Life Value calculator
Human Life Value calculator is offered by leading insurance companies. It enables you to get an idea about your required sum assured of the term insurance policy. Based on the simple formula of time value for money, it generates the existing value of all the income that you are estimated to earn in future till you retire. You have to enter certain specific details about yourself on the online HLV calculator – your current age, present yearly income and expenses and estimated future rate of inflation, to offer you the sum assured that you should opt for.
Make use of the Income Multiplier
Another online tool that you can use to determine your sum assured for a term insurance plan is to calculate it through the Income Multiplier method. Here, you have to multiply your current income by a factor of your current age group to get the minimum and maximum sum assured, as per your income and age. If you belong to the age group of 20 years to 30 years, you have to multiply your existing income by a factor of 5 for minimum sum assured and by a factor of 10 for getting results for the maximum sum assured. Similarly, for the age group of 30 years to 40 years, the income has to be multiplied by a factor of 20, for the 40 years to 50 years age bracket, the minimum multiple is 15 and for the 50 years to 60 years, age bracket the minimum multiple is 10.