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Term insurance is meant for one primary task \u2013 providing optimal financial security to your family when you are not around. The policy, thus, becomes a necessary part of your portfolio and helps you plan against unforeseen emergencies.<\/p>\n\n\n\n
India is waking up to the importance of having a life insurance policy, more so after the pandemic. In FY 2021<\/a>, the penetration of life insurance increased to 4.2% compared to 3.2% in FY 2020.<\/p>\n\n\n\n However, when it comes to choosing the right term insurance coverage, a gap is found, more often than not. According to <\/a>Llyod\u2019s Underinsurance Report 2018, India ranked in the second position in the list of most underinsured countries in the world. There was observed to be a gap of USD 27 billion or INR 1.98 lakh crores.<\/p>\n\n\n\n According to other data published by the Government and the insurance industry, 75% of Indians were not insured under any life insurance plan. Even those insured were grossly underinsured having insured themselves for only 8% of what would be needed in their absence.<\/p>\n\n\n\n A lack of awareness might be the primary reason why underinsurance is rampant in India. While people invest in a term insurance plan, they fail to opt for the right coverage amount simply because they might not know what it should be. Do you know how much term insurance coverage should you take?<\/p>\n\n\n\n If you don\u2019t, there are various ways in which you can find that out. Here are some such ways which help you calculate the term insurance coverage requirement. Have a look \u2013<\/p>\n\n\n\n <\/p>\n\n\n\n This is more like a ready reckoner that states the minimum coverage that you should have in a term insurance policy. The income rule states that the sum assured of your term life insurance policy should be at least 10 to 12 times your annual income.<\/p>\n\n\n\n So, for instance, say you have an annual income of INR 15 lakhs. In this case, your term life cover should be between INR 1.5 crores and INR 1.8 crores.<\/p>\n\n\n\n The income rule is the most basic of rules which you can use to assess if your term insurance coverage is enough or not.<\/p>\n\n\n\n <\/p>\n\n\n\n The Human Life Value (HLV) method takes a different approach to calculating your term cover requirement. Under this method, the income that you contribute to your family every year is taken into consideration. Then the sum assured is determined in such a way that the corpus, when invested, would yield the desired annual income to your family in your absence.<\/p>\n\n\n\n Let\u2019s simplify with an example.<\/p>\n\n\n\n Thus, the HLV method looks to replace your family\u2019s lost income in your absence.<\/p>\n\n\n\n <\/p>\n\n\n\n This is another calculation which uses a variation of the income rule to determine the right amount of sum assured. Under this method, the sum assured is calculated as a multiple of the annual income. However, the multiple depends on your age. It is as follows \u2013<\/p>\n\n\n\n <\/p>\n\n\n\n So, if you are 35 years old and have an annual income of INR 15 lakhs, the optimal sum assured would be 14 times the income, i.e., INR 2.1 crores.<\/p>\n\n\n\n <\/p>\n\n\n\n This is a more detailed method to determine the ideal coverage you should opt for. Under this method, the following factors are considered \u2013<\/p>\n\n\n\n All these factors are used to calculate the sum assured that would be needed. There are online calculators that assess these factors and point out the ideal sum assured for your needs.<\/p>\n\n\n\n You can use one or more of these methods to calculate the term insurance coverage requirement. Remember, an optimal sum assured is essential so that your family enjoys the same lifestyle that you provide them with. Moreover, your financial goals should also be fulfilled whether or not you are around.<\/p>\n\n\n\n So, don\u2019t be in a hurry. Calculate the optimal coverage first and then choose the right plan. You can always contact the experts at Tata Capital Wealth<\/a> for assistance or click on the link below to calculate your Human Life Value (HLV).<\/p>\n\n\n\n1. The basic income rules<\/strong><\/h2>\n\n\n\n
2. Human Life Value (HLV) method<\/strong><\/h2>\n\n\n\n
Current age<\/td> 30 years<\/td><\/tr> Retirement age<\/td> 60 years<\/td><\/tr> Net take home salary every month<\/td> Rs.55,000<\/td><\/tr> Expected rise in income<\/td> 10% every year<\/td><\/tr> Expected returns on investments<\/td> 11% per annum<\/td><\/tr> Discounting rate of interest<\/td> 0.91%<\/td><\/tr> Human Life Value<\/td> Rs. 1,74, 18, 368<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
So if you have a sum assured of INR 1.74 crores, the same would be paid to your family on your premature demise. This would replace the income that your family lost in the case of your premature demise.<\/p>\n\n\n\n3. Underwriter\u2019s rule of the thumb<\/strong><\/h2>\n\n\n\n
Age bracket<\/strong><\/td> Multiple of annual income<\/strong><\/td><\/tr> 20 to 30 years<\/td> 15 times<\/td><\/tr> 31 to 40 years<\/td> 14 times<\/td><\/tr> 41 to 45 years<\/td> 12 times<\/td><\/tr> 46 to 50 years<\/td> 10 times<\/td><\/tr> 51 to 55 years<\/td> 8 times<\/td><\/tr> 56 years and above<\/td> 6 times<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n 4. Financial need analysis<\/strong><\/h2>\n\n\n\n
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