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How to Calculate the Ideal Coverage Amount for Your Term Insurance

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How to calculate the ideal coverage Amount for your term insurnace
October 17, 2023

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A suitable answer to the uncertainties of life, term insurance can be the answer to your financial worries. While it does crisis management for your family if you die an untimely death in the form of a lump sum pay-out, the option of return of all premiums upon maturity, if you survive, is also available in certain variants of term insurance plans. 

Here, both the death and maturity benefit amounts depend on the life coverage chosen by the policyholder. Thus, choosing the ideal coverage amount is indeed a crucial task to ensure sufficient financial security for you and your family.

It's therefore a primary need to calculate the right coverage amount that best fits your needs and the convenience of premium payment. A term plan calculator can come in handy here. 

Some important factors to consider are-

  • Monthly expenses: Total the household expenditures on groceries, clothes, utility bills, fees payable and cost of other necessities. It’s ideal to get a life cover 10-12 times your annual income that would take care of all these expenses along with inflation in your absence.
  • Outstanding loans: Calculate all the loans outstanding, credit card bills and other debts that might be a burden for your family if you die suddenly. The life cover you choose should take care of these liabilities.
  • Age: Life cover should be chosen based on the policyholder’s age. For example, for an 18-year-old with no or nominal liabilities, a Rs 1 crore term insurance can be sufficient. But for a 35-year-old with a spouse and kids, the same amount may not suffice anymore. Moreover, in the first case, a cover of 60 years can be enough. But for the second case, a lifetime plan till 99 years may be more suitable for the family.
  • Life goals: Considering life goals like buying a house, children’s education or marriage, or starting a business is important while calculating the life cover required. This would take care of the fulfilment of the goals, even if you are not there. Besides, if you survive, the maturity benefit can always fund your wishes.
  • Affordability: While deciding on the life cover amount, check whether you’ll be able to smoothly pay the required premiums for the entire schedule. The term plan calculator can be useful here to arrive at the tentative premium amount.

Now that you know what factors to focus on while getting term insurance, let us check the methods to calculate the ideal coverage you need.

Here are four ways to do that: 

  • Human Life Value (HLV): In this process, the valuation of an individual in terms of his/her income, monthly expenses, liabilities and age is estimated to arrive at the life cover amount that matches the value.
  • Income Replacement: Here, the life cover is calculated as the amount needed to substitute the income of the policyholder. The term cover therefore is = annual income x years to retire.
  • Expense Replacement: The life cover in this case is the total of money required to carry on with the household expenditures, repay the loans, fund life goals and support the dependents throughout their life, taking into account the probable inflation rates, and deducting the investments you already made.
  • Underwriter’s rule: This is the simplest process where the sum assured for your term insurance is estimated to be 10x your current annual income.

However, to arrive at sufficient life coverage, you can always use the term plan calculator which calculates the sum assured, based on your choice of tenure and affordable premium amount. 

Related articles:

ARN - ED/08/23/4274

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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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