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How Much Term Insurance Coverage Do You Need?

Published On Aug 08, 2021 10:00 AM By Yamini Sharma

It is advisable to get a clear idea of term insurance coverage required before actually starting the search for term insurance plans. Having a clear idea about how much insurance coverage you need would help you save yourself from insufficient coverage or wrong coverage. 

Learn that ideally the death benefit amount payable under a term insurance plan should be sufficient to cater to your family’s needs for an extended period. However, if you want to be specific about the term insurance amount you need, below mentioned are the 3 prime methods to calculate the amount. 

3 Key Methods to Calculate the Term Insurance Coverage Amount

1. Human Life Value (HLV) Method

In order to calculate the term insurance coverage you need through the HLV method, you will have to calculate your total economic value throughout your lifetime. To find out the amount, you will have to: 

  • Consider your monthly or annual expenditure, number of dependents, future goals & financial responsibilities associated with each dependent and loans or debts (if any). 
  • Once you have all the elements, add the figures. 
  • Multiply the total amount with the inflation rate in the forthcoming 20 years to 30 years 

The amount received as the result of the calculation would be the term insurance amount you need.

2. Income Replacement Method

In order to calculate term insurance through the Income Replacement Method, you will have to:

  • Multiply your annual income with the number of years remaining until you retire. 

The income replacement method will shed light on the coverage of term insurance that will be enough to compensate for your lost income, in case you cannot earn for your family.

3. Expense Replacement Method

Under the expense replacement method:

  • Use the HLV (Human Life Value) method as the first step. 
  • After the total value is calculated, add up the sum of your investments and financial assets. 
  • Deduct the sum received in the above step from the value arrived at by the HLV method. The result would be the term insurance amount you will need.

Now that you are aware of the three prime methods to use to calculate the term insurance coverage amount you need, go ahead and use one that you think suits you the most. As far as choosing the right term insurance plan is concerned, know that the process will require you to emphasize certain aspects.

Things to Consider to Choose the Right Term Plan

To make an ideal term insurance plan choice, make sure you keep the following elements in mind:

  • A clear assessment of your monthly daily expenses. 
  • Goals and requirements of your loved ones like higher education, marriage, travel, etc.
  • Number of dependents you have
  • Features and benefits offered under the term insurance plan

That said, what are you waiting for? Go ahead and buy your ideal term insurance plan. Make sure you have all the important documents like age proof, address proof, identity proof, passport size photographs, income proof and PAN/Form 16 prepared to enable a smooth purchase process. 

You may also like to read - Is LIC Term Insurance Worth Investing In?

How Long My Term Insurance Cover Should Be ?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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