How much term insurance cover do I need?

It is difficult to put a price on one’s life. But when it comes to the protection of your family you need to have an adequate sum insured. When the earning member of a family dies early the whole family suffers a setback. Hence buying a life insurance policy is important as it takes care of the financial well-being of the family when you are not around. To help you give complete protection to your family here are a few steps to calculate how much term insurance cover you should buy.

But first things first. What is term insurance?

Under term insurance, you pay a regular premium to the insurance company for a specific number of years. In return, the insurance company pays the sum insured to the family in case of sudden death. The money is paid so that their financial goals are met along with liabilities.

The next question is how much life insurance one should buy?

Method 1: Income Replacement Method

10-15 times your annual salary

One simple way is to get insurance cover of at least 10-15 times your annual salary. It gives the family a cushion of around ten years to adjust to the financial consequences of early death. For example if your annual salary is Rs 20 lakh, then your insurance cover should be at least Rs 2 crore. The interest income earned on Rs2 crore, at an assumed rate of 7%, will fetch your family an income of Rs 14 lakh every year.

Method 2: Need Analysis Methods

Step 1: Monthly expenses

It is a comprehensive method. It includes the present value of future expenses as well as future and existing liabilities. Suppose your monthly expenses are Rs 50,000, which works out to Rs 6 lakh a year. In case of a sudden demise it is recommended that your family should be able to meet these expenses for at least 10-15 years. Keeping inflation in mind you should buy a cover at least 15 times of your annual expenses, which comes to Rs 90 lakh.

Step 2: Evaluate Liabilities

Do not forget to factor in loans as it would help the family in repayment of outstanding balances in case of any mishap. Now suppose you have a home loan of Rs 60 lakh. In case of a sudden demise, your term insurance cover should also be able to pay a home loan so that it does not fall on your family.

Step 3: Child Education

You should calculate how much money you will need for the future education of your child. For example, if you want to send your child abroad then the cost can work out to Rs 1 crore.

Step 4: Retirement Expenses

You also need to ensure that your spouse continues to meet the monthly expenses without any support. In such a case you might need to provide for another Rs 50 lakh for making your spouse’s life comfortable post-retirement.

Step 5: Existing Corpus

Now, one needs to calculate current investments such as mutual funds, PPF and EPF that will be available to family upon the death of the insured. If one has a portfolio of Rs 50 lakh then it needs to be subtracted from the total liabilities of Rs 3 crore(90 lakh + 60 lakh + 1 crore + 50 lakh).

Here in this case you will need to buy a cover of Rs 2.5 crore.

After calculating the size of term insurance cover opt for a simple term insurance policy. You can also buy a policy online as well considering the premium rates for online policies is almost half. Last but not the least do not forget to increase or decrease your life cover as your liabilities change.