How to determine the right term insurance cover?
One of the critical challenges that everyone who strives to buy a perfect term insurance face is the right life cover.
Ravi, a 40 years old young family man, wants to buy a term insurance policy to give complete financial protection for his family. But he is struck with a question, what should be the right amount of coverage he needs to take?
This is a very common question that crosses almost everyone’s mind when buying a term plan. But at the same time, many people forget to focus on this crucial point and thereby end up taking a term plan with significantly less cover.
If you have the same question in mind, then here is an answer for you. Keep reading!
Why is an insurance cover necessary?
The term insurance coverage is one thing that will determine the claim amount at the time of settlement. So, the amount you are going to choose is the one you will receive at the time of claiming and which will support your family hugely.
If you choose less cover, then remember, the increasing cost of living and reduction in the value of money, mainly due to inflation, will have no meaning to give fruitful support to your family at the time of claim settlement.
While at the same time, taking a very high cover beyond your ability to pay the premium might end up missing your premium payment in between, in case your affordability becomes a question at any point in your life. Therefore, with the defaults in the premium payment, your term insurance plan may lapse, and your entire effort might be wasted.
So how should you determine your cover?
Choosing the best term insurance plan is always a challenge. The main challenge here is selecting your cover amount. Here are the top 7 factors that determine your cover amount:
7 Factors determining the cover of term insurance amount
- Make a Smart Decision
- Future Financial Goals
- 25 times your Annual Income
- Your Liabilities
- Varying Future Financial Needs
- Your Age
- Period you want to remain covered
1. Make a Smart Decision
This implies, as the first step, try to consider all possible factors that might influence your family’s financial strategy. For example, do not just take your children’s education or debts you currently have into your consideration.
2. Future Financial Goals
The financial goal you have today might not be the same after 10 years down the period. After 10 years, there might have been many changes happening in your life, making you think that your financial commitments have increased and you need to work more to meet that out. Therefore, always try to have a clear forecast about your future financial goals, and it is always recommendable to consider a higher target than what you may need.
3. 25 times your Annual Income
If you are unclear about the cover you want to choose, here is a small trick that can help you determine the cover. Take your current annual income into account. Now calculate your yearly income into 25 times or of the least 20 times. Now you will get an amount, and this amount will be your term insurance plan cover, which you need to take.
4. Your Liabilities
This is another factor you need to consider to determine your cover amount seriously. Your liabilities might include your yearly household expenses, including your monthly bills, groceries, house rental, EMIs for bank or house loans, insurance premiums for motor vehicles or health or other investment plans, school fees, and other family expenses. Remember, these liabilities will keep increasing as the years roll on because of the increased cost of living and fluctuating inflation rate.
5. Varying Future Financial Needs
Now, your children might be young doing their primary schooling. You might not have a clear idea about what their higher studies are going to be. But in case if they want to go for top range graduation, you might have to prepare for a higher saving for their education without any interruption or disappointing them. In this case, your future financial need might shoot up unexpectedly. In addition, your children’s wedding is another significant challenge for your financial planning.
6. Your Age
Never miss this vital factor. This is because as your age increases, your sum assured will reduce, and the premium amount will increase. Therefore, ultimately you might miss the opportunity to get a higher cover. Therefore, never hesitate any further to buy your term plan, and start reacting immediately to get a better cover.
Here is a small calculative analysis for your age with term plan cover:
- If you are between 25 and 35 years of age, then;
= (Approx. 20 times X Your current annual income) + Your outstanding loans.
- If you are between 36 to 45 years of age, then:
= (Approx. 15 times X Your current annual income) + Your outstanding loans
- If you are between 46 to 55 years of age, then:
= (Approx. 10 times X Your current annual income) + Your outstanding loans
7. Period you want to remain covered
This is another essential factor that is going to determine your cover amount. Try to decide if you’re going to be covered until your age of 50, 60 years of 70 and above.
All these above determining factors can help you to choose your term plan cover quickly. Besides, it would be best to do thorough research online and garner more details on the same online from the insurance company’s website and decide your cover accordingly.