The primary reason to invest in term insurance plans is to ensure that your family has substantial funds in the case of any untoward incident with you. Have you ever thought about how much money your loved ones will require to maintain their lifestyle once you are no longer around? Well, it is necessary to ascertain the amount before considering the sum assured of a term plan.
Many people randomly purchase a term plan worth INR 1 crore without calculating the approximate amount their family members will need after their demise. Though the eight-figure sum is a high value, it may not be sufficient to fulfill the financial aspirations of your dear ones. For instance, if your child dreams of studying abroad, this sum may not solve the purpose, as your dependents may use the amount to manage household expenses and meet other financial goals.
If you do not know how to calculate the right life cover, you can do so by considering aspects like:
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Annual income
The household expenses are met through your monthly income. Therefore, it is essential to determine the sum assured needed to help your family live a financially independent life during your absence. It is advisable to keep a life cover that is a minimum of 10 times your annual income. However, with the growing cost of education and the constant increase in the inflation rate, it is suggested that you keep your life cover at least 15-20 times your yearly earnings. For instance, if your annual salary is INR 6 lakh a year, the estimated sum should be approximately INR 1.
Liabilities and investments
While calculating the sum assured of your term insurance policy, you need to consider your outstanding obligations, such as a home loan and car loan. The sum assured of your term plan should not be less than the total of all your liabilities. Your family should not be burdened with managing your loans’ Equated Monthly Installments (EMIs). Apart from your debts, review your investments in bank fixed deposits, mutual funds, bonds, stocks, and Unit-linked Insurance Plans (ULIPs). Compute the total of these assets and reduce this amount from your sum assured.
Important milestones
It would help to remember landmark events while ascertaining the sum assured. For instance, if you plan to get married and start a family, you will have extra responsibilities on your shoulders. As education costs rise daily, you must plan accordingly while opting for the sum assured.
Age
Your life goals will change with age. For instance, you will have minimal financial responsibilities when young and unmarried. However, when you have a wife and children, your obligations increase. You must support your spouse and pay for your children’s education. So, it becomes necessary to review your term plan at regular intervals.
You can follow a thumb rule according to your age. For instance, when your period is between 25 and 35, you can select a sum assured, at least 20 times your annual income. Between 36 and 45, you can opt for an aggregate guaranteed approximately 15 times your yearly payment. When you are 46 to 55, choose a sum assured ten times your annual earnings. Remember to add your outstanding loans to the sum assured, irrespective of age.
Now that you know how to determine the sum assured of your term plan, it is time to seek the help of a term insurance premium calculator. This tool will help you find a suitable policy as per your requirements.
A term plan comes with term insurance tax benefits. You get a maximum exemption of INR 1.5 lakh per year on the premium paid. Moreover, your family receives a tax-free death benefit. These term insurance tax benefits make it a worthy buy. So, invest in a term plan at the earliest and secure your family’s monetary well-being.
