4 Easy Ways to Calculate Your Term Insurance Coverage Amount
Uncertainties can lead to various problems in life and need high protection. The only way to overcome financial risks is by buying term life insurance because it offers several benefits to a policyholder. However, those who want to purchase a new policy should keep certain things in mind that will help a lot to reduce mental worries significantly. They should also focus more on calculating the premium amount before purchasing a plan. This, in turn, gives ways to pick a plan that suits the budget and requirements of a person.
A term insurance plan allows policyholders to ensure financial security in life that will help a lot live a trouble-free life. On the other hand, customers should understand the coverage and other things with more attention when buying a policy. Selecting a plan with the right coverage allows a nominee to claim amounts easily during the absence of a policyholder. Therefore, a policy buyer should calculate the term life insurance coverage amount properly when purchasing a plan.
4 Methods to calculate term insurance coverage amount
1. Human Life Value
Human life value is the first method that plays an important role in deciding the insurance coverage amount. This method primarily focuses on the economic value or human life value of a policy buyer. He/she should consider certain things while buying term insurance plans from an insurer. Some of them include age, income, expenses, current savings, outstanding loans, retirement age, future responsibilities, insurance premium, tax payable, surplus income for the family, etc.
Policy buyers should also include inflation in this method to help determine the coverage amount. In addition, most insurance companies offer a human life value calculator on their websites, and a policy buyer should use the same to know the coverage amount. At the same time, the human life value may vary from one insurer to another, and a policy buyer should know it while investing money.
2. Income Replacement Value
Income replacement value is the second method to calculate the coverage amount of term plans that help meet the essential needs. The sudden demise of a sole breadwinner will result in unexpected financial problems for a family. Therefore, it is wise to select a term life insurance plan to manage them with ease. A policy buyer should use this method to calculate the coverage amount by replacing the lost earnings so that his/her family can continue their lifestyle during unforeseen events.
The main drawback of this method is that it will suggest a high coverage based on the future income. For example, when a person has an annual income of Rs.4 lakhs and is planning to retire after 30 years, then he/she requires a coverage amount of Rs 1.2 crores.
3. Expenses Replacement
Expenses replacement is the third method used to determine the insurance coverage amount. Policy buyers should calculate their day-to-day household expenses, outstanding loans, goals, and loans. Provision for a non-working spouse, children’s education, children’s marriage, kind of lifestyle for a family, and special needs are some important aspects to consider in goals in this method.
Once a policy buyer sums up all the expenses, he/she can arrive at a figure that determines the needs of his/her family. Buyers can decide the coverage amount after deducting their existing assets and investments. The family method budget formula enables a policy buyer to get an overall idea of insurance coverage amount that will help to select a plan based on his/her choices. Not only that, it gives ways to safeguard a family from financial threats and other issues to a large extent.
4. Underwriter’s Thumb Rule
This is the 4th step that allows a policy buyer to determine the insurance coverage amount that will help proceed further. Under this approach, policy buyers should have the required sum insured amount in multiples of annual income depending on the age. For example, those who are in the age group 21-30 years should have a coverage of 25 times their annual income. At the same time, people aged 31-40 years should have coverage 20 times of their income.
In most cases, insurance companies suggest policy buyers select a plan with a coverage of 10 times based on their annual income irrespective of age. However, a policy buyer should also keep some other factors in mind while calculating insurance coverage. On the other hand, it doesn’t give the exact picture because many insurers promote insurance plans with 10% times of annual income.
What are the factors that affect the term insurance premiums?
Several factors will influence the premiums of term life insurance plans, and customers should evaluate them properly. It is wise to learn how to calculate term insurance cover based on them. Age is the most important factor that can affect a plan’s premiums, and elder people have to pay high premium amounts. Gender is another thing that can impact the premium because many insurance companies offer special discounts for females due to high life expectancy.
Medical history and lifestyle are some other factors that will influence the premium rates of an insurance plan. People who have diabetes, cholesterol, and high blood pressure should pay more for the premiums. The same goes with drinking and smoking because the risks are high.
How to determine the right insurance coverage amount?
Policy buyers should know more about the methods of premium calculation in detail when they want to determine the right insurance coverage amount. It is possible that the existing policy may become inadequate when the life value increases or the goal changes. Therefore, it is important to go for a plan that offers wide coverage for a policyholder. Customers should read reviews of insurance companies online first when they like to buy a new plan. They can also compare the premium prices that will help make an informed decision. Apart from that, it will help select a plan with adequate insurance coverage at affordable prices to ensure peace of mind.