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How Much Term Insurance Coverage Do I Need?

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How Much Term Insurance Coverage Do I Need?
April 01, 2024

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When thinking about long-term financial security, one often wonders, “How Much Term Insurance Coverage Do I Need?" Term insurance is an important option for financial protection of your loved ones in case of unexpected events, but it may be difficult to choose the right amount of coverage. 

So, if you are asking yourself, ‘how much term life insurance do I need’ you must consider several impacting variables to get optimal coverage. These include -  income, expenditures, obligations, and future financial objectives. In answering this question, people may better understand how much life insurance they need to protect their loved ones financially if the policyholder passes away.

This blog will walk you through the steps of determining how much term insurance do I need and what considerations you should make along the way.

What is the Meaning of Term Insurance Coverage?

The term insurance structure is straightforward, providing pure life protection. You will pay an annual premium to the insurance company for a certain period. During that time, the insurer agrees to pay your family the life insurance cover amount in case of your death.

Term life insurance does not offer a maturity advantage. However, compared to other life insurance plans on the market, it offers more coverage for a lower price.

How Much Term Insurance Coverage Does One Need?

So, how much term insurance do I need? A term insurance policy with coverage up to ten times the yearly salary is highly recommended. However, to safeguard your loved ones, the term insurance coverage needed is determined by an individual's risk appetite and requirements assessment. A systematic procedure for determining the optimal level of coverage is shown here:

  • Consider the Monthly Expenses of Your Dependent

    Start by tallying up your dependent's monthly outlays for necessities, including housing, utilities, food, transportation, schooling, healthcare, and more.

  • Assess Your Owings

    Make a list of your monetary responsibilities, including mortgages, auto loans, personal loans, credit card payments balance, and any other loans you may have. Ensure your term insurance policy covers these responsibilities enough so your loved ones won't have to worry about paying off your debt.

  • Think About All the Big Things You Want to Afford

    Think about all the big things you want to afford, such as your kids' college tuition, your wedding, a home, or a company. Include an estimate of the future costs linked with these objectives in your coverage amount.

  • Your Spouse's Living Expenses

    When planning for your retirement, consider your spouse's expected living expenses if you are not there to support them financially. This might be an extra safety net for your spouse if you are the main earner in your family. This sum should meet expenses for housing, food, medical care, and other necessities from your retirement corpus.

  • Term of Insurance

    The amount of term insurance you require is heavily dependent on your age. The requirement for coverage is often more significant for younger people with dependents than for older people without dependents. It may be necessary to reevaluate and modify your coverage level in light of changes in your financial obligations and age.

To determine how much coverage you'll need to protect your loved ones financially and reach your financial objectives, add up all the projected costs with the Term Insurance Calculator. With this sum in coverage, your loved ones should be able to keep up with their current lifestyle, take care of their financial responsibilities, and go after their dreams even if they pass away.

How does Term Insurance Coverage Work in India?

Term life insurance protects the policyholder's loved ones financially during their untimely death, allowing them to continue living comfortably, paying off debts and obligations, and saving for the future. 

To keep up with inflation and rising living costs, such as those associated with education and healthcare, the ideal amount of life assured coverage is ten to twelve times the policyholder's yearly salary. Thus, a person earning Rs 10 lakh a year should choose life insurance of Rs 1 crore or more. Along with the term insurance cover, you can opt for riders like accidental death benefit as well. It will also have additional payout in case of an accident without adding to the tax burden. Income Tax Act 1961*, Section 10(10D), provides that the accidental death benefit payout is exempt from taxation.

Methods to Calculate How Much Term Insurance is Sufficient for an Individual?

You may determine how much term insurance do I need using one of four approaches:

  • Human Life Value(HLV)

    This technique may calculate a person's Human Life Value or monetary worth to their family. Age, monthly costs, total debts and obligations, and yearly income are all factors. You may use this information to determine the appropriate level of coverage.

  • Income Replacement

    The term insurance cover equals the existing gross annual income times the number of retirement years remaining, which is the most straightforward approach to calculating the income replacement value.

  • Expense Replacement

    Financial counsellors recommend this approach, which involves tracking one's daily spending, obligations, and goals, such as saving for a child's college education or helping out dependent parents financially throughout their lives. The amount you attain will meet all of your loved ones' financial needs. Subtracting the present worth of your assets from the coverage you already possess is the second stage.

  • Underwriter’s Rule

    A sum assured equal to 10 times your yearly income is a good starting point for calculating the minimum term coverage you need. Therefore, if your current salary is ten lacs rupees, you need to choose life insurance of one crore rupees.

Points to Note While Calculating Your Term Insurance Cover

Some of the points while calculating amount of term insurance needed are:

  • Factor in your monthly expense

    To calculate the coverage amount, take into account the total monthly expense of your household. This should include grocery bills, electricity and telephone bills, rent and taxes, fuel costs, prices of clothes and other necessities.

  • Get a liabilities check

    There might be outstanding loans which should not become a burden to your family if you are not there. Add up your liabilities like home loans, car loans or other EMIs to decide the term insurance coverage amount.

  • Map your goals

    Lump sum savings are needed to fund your child’s higher studies, marriage or retirement plan. Keep that in mind while calculating the coverage to help your family fulfil their dreams in your absence.

  • Assess your policy tenure

    When you are 25 and single, a policy with a tenure till your retirement age can suffice. But if you are 40+ with a spouse and a child, the tenure and coverage should be planned accordingly, focusing on the family goals.

    Once done with all the calculations, choosing the right term insurance will be an easy game!

  • Consider Your Current Wealth

    It is essential to consider your present wealth and assets when determining your term insurance coverage.  In the unfortunate case of your untimely death, your family may rely on your present fortune as a financial foundation. Money, stocks, bonds, real estate, and retirement funds are all part of it. In times of need, these assets may help your family financially right away.

    However, you must determine the assets' liquidity or how quickly they can be turned into cash. Some assets could be easy to sell off, while others might take a while. Your family's urgent financial needs may be met with the help of liquid assets such as savings accounts, fixed deposits, and equities. Think over all of your financial commitments, such as loans, mortgages, and outstanding bills. Your net worth and the financial resources accessible to your family may be better understood by subtracting your obligations from your overall assets.

Things to Consider Before Choosing the Term Life Insurance Cover

The most important task is deciding how much coverage amount will be sufficient to support the family in case the unforeseen happens. While various factors need to be considered, one should also check one’s affordability to pay the premiums regularly. 

1. Life goals:

You might have planned your child’s higher studies or marriage. What if suddenly you are not there? An adequate life cover of your term insurance plan can keep fuelling your dreams in your absence and take care of these life goals.

2. Age:

Life goals and liabilities change as you age. When you are young and single, you can look forward to buying a fancy car. But as you approach 40 and have a family, your goals can shift to saving for a house or your child’s education. Hence the coverage should be decided depending on your age and varying priorities. At a young age, it’s easier to go for higher life cover as premiums are low. 

3. Regular income:

No matter how much you earn, sudden expenses are a burden. So, while deciding the amount of life cover, check if the premium is affordable as it needs to be paid regularly. 

Steps to Buy Term Insurance Plans in India

After finalizing how much term insurance can you get, making the initial payment and purchasing the plan are the next steps. Buying a term plan online follows a similar general procedure across all insurers however the specifics may vary.

Step 1: Go to the term insurance calculator page.

Step 2: Provide all the necessary details like name, gender, date of birth, email ID, mobile number etc. & click on “Check Premium”

Step 3: Answer some questions & check your term insurance premium amount.

Step 4: Choose a life cover, premium policy & payment term, add riders and proceed.

Step 5: Enter your other essential details like educational qualification, occupation etc.

Step 6: Check all the details provided & make the payment to confirm your term insurance purchase.

Conclusion 

Finally, there are a lot of elements to think about when deciding how much term plan should I take. To choose an affordable quantity of coverage that would adequately safeguard your loved ones financially, you should take stock of your obligations, your dependents' financial demands, major life events and aspirations, and your spouse's retirement savings. 

The quantity of coverage you require is also heavily influenced by your age; generally, younger people usually need more coverage. If you evaluate and update your term insurance coverage regularly to ensure it still meets your shifting financial circumstances, you may rest easy knowing that your loved ones will be financially supported in the case of your untimely death.

FAQs on how much term insurance is needed 

Q. What is the meaning of term insurance cover? 

The financial security offered by an insurance policy for a set duration, called the policy term, is called term insurance cover. The insurer guarantees the insured's nominee or beneficiary a certain amount in the case of the insured's death during the policy term.

Q. How much term insurance should I take?

Consider your income, assets, obligations, way of life, and long-term financial objectives when determining the appropriate level of term insurance coverage. To get the right quantity of coverage that safeguards your loved ones financially, it's wise to take stock of your dependents' expenses, debts, and other commitments.

Q. At what age should one buy term insurance?

Best term insurance plan is purchased when one is younger, when they have fewer financial obligations and responsibilities. The best way to save money and provide financial security for your family is to get term insurance early to lock in cheaper rates and coverage for a longer period.

Q. What is the thumb rule for term insurance?

A popular recommendation is to acquire term insurance coverage equal to 10–15 times your yearly salary, while there is no hard and fast rule for this. Nevertheless, one's lifestyle, number of dependents, quantity of debt, and future financial objectives could affect the precise level of coverage required.

Q. What is excluded under term insurance cover?

Deaths caused by pre-existing conditions that were not disclosed when applying, suicide within the policy's specified suicide clause period, deaths that result from engaging in hazardous or illegal activities, and deaths that occur outside of the policy's coverage area are among the many excluded scenarios from term insurance. If you want to know what your term insurance policy doesn't cover, you need to read the policy text thoroughly.

Q. How much term insurance do I need in India?

Income, expenditures, obligations, and financial objectives are some of the variables that determine an individual's term insurance coverage needs in India. The best way to safeguard your family's financial future is to take stock of your current financial status and talk to a financial expert about what kind of coverage would be suitable.

Q. How much insurance does a 35 year old need?

Income, expenditures, obligations, and long-term financial objectives are some of the variables that determine how much insurance a 35-year-old needs. To provide full financial security for their family in the case of their unfortunate demise, a 35-year-old may need term insurance coverage that is atleast 10 - 20 times their yearly salary. To get the right coverage, it's important to look at personal situations and talk to a financial counsellor.

ARN - ED/03/24/10388

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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