How Much Term Life Insurance Cover Do I Need?
Updated On Apr 22, 2021
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erm life insurance does not have a maturity benefit. However, compared with most life insurance policies offered on the market, it has greater coverage at a smaller premium. You should buy a term insurance policy that in the case of your death, can provide your dependents with a certain corpus. They will be able to retain the same lifestyle or pay off current obligations without sacrificing on their dreams due to the sum assured they will earn from life insurance.
How Much Term Life Insurance Cover You Need?
Term covers are the most effective when it comes to life insurance, as they give full protection at the lowest costs. Only buying life insurance, though, is not enough. The key is to have adequate sum assured to take care of the needs of your family. We look at four strategies that will help you determine how much life cover you need:
1. Human Life Value
This methodology considers the person's economic worth or human life value (HLV) to the family. In order to assess the insurance requirement, you need to consider your income, expenses, planned future commitments, investments, and priorities under the HLV method. This method provides more clarity while keeping inflation in mind. Most insurance providers recommend this form, and many insurers have an HLV calculator on their websites.
Income Replacement: It is assumed, in this method, that life insurance can cover the breadwinner's lost earnings.
One of the best methods to measure the replacement value of your income is: insurance cover = current annual income x years left to retire.
2. Expense Replacement
Individuals need to calculate their day-to-day family expenses, debts and priorities such as child schooling, as well as providing for financially dependent parents for their whole life, under this approach suggested by financial advisors. The amount you get is the overall money that would be needed for your family. The next step is to deduct the present value of your savings and life cover when calculating the value of your investments, exclude assets such as the home you live in as your family members are likely to continue using them. The amount you get by deducting investments and insurance cover from goals and expenses will give you an indication of how much cover you need.
3. Underwriter’s Rule
You should go by the common thumb law of having an amount guaranteed that is 10 times your annual income to determine the minimum cover you need. Many insurance providers promote insurance coverage that is 10 times your taxable salary. That is the reason why it has become a rule of thumb. At least 15-20 times your annual income should be the minimum protection.
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The pandemic has driven home the point that taking life insurance is one of the most important financial decisions that one can make. The demand for life insurance plans spiked following the outbreak. However, just buying life insurance is not enough. The key is to get an adequate sum assured to take care of your family’s needs.