A financial portfolio is incomplete without the addition of a good term insurance policy. What is term insurance? It is a financial product that provides monetary aid to your loved ones if an unfortunate event leads to your demise. This is an especially important product to opt for if you have various financial dependents. As the primary breadwinner of the family, you would be working hard to ensure they have a secure present. However, there is no saying what the future will look like. How will your family cope when you are no longer around to take care of them? A term insurance policy with an adequate life cover amount can help out in such a scenario.
Not only is it important to buy a term insurance policy but you must also ensure to calculate the right sum assured amount that fits your loved ones’ needs.
How does term insurance work?
A term insurance offers security to your loved ones in your absence. In return, you are expected to pay the premium on a regular basis. The premium is based on several factors subjective to the policyholder such as their age, gender, lifestyle habits, occupation, and so on. One must pay this premium on time to ensure the continuance of the policy. If one fails to do so, one runs the risk of losing their term insurance coverage.
Term insurance policies are valid only for a particular period. If the policyholder passes away during this period, the beneficiaries chosen by them receive the sum assured amount. This benefit amount is provided only if the demise has occurred in a manner covered by the term insurance policy.
Why calculate your term insurance cover in the right manner
If you have financial dependents, then it is highly likely that you take care of several aspects of their financial well-being. This includes but is not limited to meeting the daily household expenses, paying for children’s education, providing for lifestyle costs, and so on. Alongside, you must also be responsible for future savings, and medical bills, amongst other things.
As long as you are earning a stable income, these costs are taken care of. However, if an unfortunate event were to occur that would lead to your demise, your family will be bereft of this financial stability. With a term insurance policy, they have the support of a hefty sum of money. If you choose a small amount, there is a chance it may run out sooner than expected. This can lead to financial difficulties for your loved ones, especially if there is no other source of stable income. Hence, to avoid such a situation from arising, you should calculate your sum assured amount carefully and choose a high amount that takes care of multiple things.
You must also be wondering, how can one arrive at the correct term insurance cover amount? A term insurance calculator may give an estimate based on the variables you provide, but there are many other factors that should be taken into consideration.
How to calculate the right term insurance cover
There are a variety of techniques and tools you can use to come to the right term insurance cover for yourself. We list out some of them:
Calculating your human life value
This method takes a look at aspects, such as your present age, gender, occupation, income, retirement age, expenses and debts, and so on, to arrive at an estimate. You do not have to do the calculation yourself. Like the term insurance calculator, the human life value calculator can also be accessed online.
Using the underwriter’s thumb rule
As per this method, one must choose their term insurance cover amount based on their age and annual income. For instance, those in their 20s and 30s must multiply their annual salary 25 times and the amount that they arrive at can be the ideal sum assured amount.
Opting for the income replacement method
Since your income takes care of the expenses of your loved ones, you need to take that majorly into consideration here. One must take their annual income and multiply it with the number of years remaining till their retirement. The figure you arrive at can be a suitable term insurance cover amount.
When you secure your family’s future in the right manner, you not only benefit them but also provide yourself with a deeper peace of mind. Thus, aside from knowing what term insurance is and how it can help you, one must also ensure they select the right term insurance amount for their loved ones and themselves.