When you are the sole income earner or breadwinner of your family, you go the extra mile to take care of them. But what happens when you are not around to do so? At such a time, you would not want to leave your loved ones without a backup. What can keep them secure is term plan coverage. A term plan is the simplest form of life insurance. It is one of the most availed types of insurance and is a hit with small and large families alike as a term insurance plan provides extensive financial coverage at affordable prices.
What is term insurance?
Term insurance is a simple type of life insurance that provides monetary support to your loved ones in your absence. It does this by paying a pre-decided amount (called the sum assured) to your family members (called the beneficiaries/nominees) in exchange for periodic payments called premiums in case of your unforeseen demise. A term plan lasts around 30-40 years and covers you during its entire tenure. It gives your beneficiaries the sum assured on your death only if it occurs during the tenure of the term plan. Term plans do not have any maturity or survival benefits.
Strategies to decide how much term cover you need
The sum assured in a term plan has to be selected by you while buying the term plan coverage. This means that before getting an offline or online term insurance plan, you should have an idea of how much coverage you will need for your family. However, most buyers do not decide on this amount and end up with the wrong term plan. They end up either over-insured or underinsured, which is a waste of their effort and investment. That is why it is crucial that you first decide how much term insurance coverage you will need. There are three ways to do this:
- The Income Replacement method
To calculate the amount of term insurance coverage you need, you can use the income replacement method. This method consists of getting a coverage amount equivalent to fund your family’s lifestyle post your retirement. All you have to do is take your annual income and multiply it by the number of years left for your retirement.
Formula: Annual income X no. of years left for retirement = term insurance coverage.
- The Expense Replacement method
Many financial experts suggest using the expense replacement method as it gives an accurate result as to how much term insurance you will need. Here are the steps you need to follow:
- Calculate your daily/monthly household expenses such as bills, groceries, or utilities, and others.
- Assess how much you will need for your family’s future life goals such as education, marriage, business, medical expenses, etc.
- Note down if you have any loans or debts and how much you will need to set aside for it.
- Add these expenses up and note them down.
- Next, calculate the total value of your investments and assets such as real estate, gold, mutual funds, stocks, etc. Leave assets such as your home and car out of it as your family will mostly continue to use them.
- Add Step no. 1 + 2 + 3 and minus it with step 5.
- Next, take that value and multiply it with the inflation rate at the time of your retirement. It will give you an accurate figure of how much coverage you will need.
Formula: Daily expenses + Future life goal expenses + loans/debt expenses – the total value of investments X inflation rate at the time of retirement = term insurance coverage.
- The Thumb Rule method:
You can also use the thumb rule method to find the amount of term insurance you will need. This method uses your age as the basis to give you a general idea of how much financial support you will need. It states:
- If you are between 25-35 years, get term insurance around 20 times your annual income.
- If you are between 35-45 years, get term insurance around 15 times your annual income.
- If you are between 45-60 years, get term insurance around 10 times your annual income.
How to buy the right term plan?
There are various methods to find the right family term insurance plan for you. You can use whichever one you find suitable. However, most insurance companies have an insurance calculating tool that helps you find out how much coverage you need and the premiums you have to pay for it. This is of extreme use to find the perfect offline or online term insurance plan.
As mentioned above, before you set to find the right term plan, you need to figure out the term insurance cover you require. After that, you can move on to searching for the term plan and insurer of your choice. Mostly, you get a one-time payment term insurance plan. However, there are term plans that offer you several premium payment options.