Rohan was considering a term life insurance plan but was confused on the amount of coverage needed. While on one hand, he was considering a lower cover to save on the premiums, his financial advisor, on the other hand, was urging him to take a sufficient cover based on his needs. Rohan was at a crossroads and didn’t know which road to choose.
Are you also facing such a dilemma when choosing the coverage for a term insurance plan?
While it is advised to choose coverage proportionate to your family’s needs, it often becomes difficult for the common man to know the correct amount of coverage required. There are different ways to calculate and understand the cover required. Do you what they are? Let’s find out:
- Human Life Value (HLV)
Under this method, the aim is to replace your annual income in case of your premature death. The method calculates a lump sum amount which is payable on death. This lump sum, when invested in a risk-free investment, would yield an annual interest equivalent to your annual income and thus replace your annual income. Here is how the method works:
| Assumed annual income | Rs.10 lakhs |
| Rate of return expected from a risk-free investment | 8% |
| Corpus required | 10 lakhs / 0.08 = Rs.1.25 crores |
If your family invests this corpus, they can receive Rs.10 lakhs as annual interest, which replaces your lost income. You can also add your liabilities to this corpus and deduct any assets you have to arrive at the exact figure.
- Underwriter’s Thumb Rule Technique
This technique is generally adopted by underwriters to assess the coverage requirement of individuals based on their income and age. The principle behind this technique is that higher coverage is required in younger ages and lower coverage in higher ages. According to this technique, if you are between 20 and 30 years, the coverage should be 15 times your annual income. If your age is 31-40 years, it should be 14 times the annual income and so on.
- Income replacement technique
This technique also aims to replace your income like the HLV method, but it is slightly different. Here, your working life is taken into consideration. For instance, if you are aged 40 years and expect to work till 65 years of age earning an average of Rs.10 lakhs every year, you are expected to earn Rs.2.5 crores through your working life. If you die prematurely, your family loses this Rs.2.5 crores which you were expected to contribute. Thus, you should buy a cover of Rs.2.5 crores.
- Income multiplier technique
This is, by far, the easiest and the most straightforward method. Under this method, the cover is calculated as 10 to 12 times your annual income. So, if your income is Rs.10 lakhs, the coverage should be Rs.1 crore to Rs.1.2 crores.
What should you do?
Ideally, you should calculate your coverage amount using any of the above methods and then buy a term insurance plan. If you find the above-mentioned techniques too complicated, you can seek an online term life insurance calculator to determine your ideal coverage amount. Term insurance calculators do all the calculations themselves without making you do the tedious computations yourself. You need to provide your family details, income details, details about your assets and liabilities and your age. After you input these factors, the calculator does the calculations based on your inputs and shows you the ideal coverage amount.
Coverfox is an online platform that allows you the facility of online term insurance calculators. After you provide your details, the recommended coverage amount is displayed. The details required include your gender, age, tobacco usage, annual income and contact details. While your gender, age and tobacco usage determines the rate of premium, the annual income determines the coverage required. You are also shown a list of available term insurance plans with their coverage features and quotes. You can choose any plan you like and also buy it online.
Now you know how much coverage you require for a term life plan. Rohan’s financial advisor convinced him to opt for an ideal cover which Rohan calculated online on the Coverfox website. You too can calculate your ideal cover amount online. So, calculate your cover and buy a term plan with the optimal Sum Assured.
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