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 has a dream to study abroad, this sum may not solve the purpose, as your dependents may use the amount to manage the 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:
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 rate of inflation, 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, then the ideal sum assured should be approximately INR 1.
Liabilities and investments
While calculating the sum assured of your term insurance policy, you need to take your outstanding obligations, such as a home loan and car loan, into account. The sum assured of your term plan should not be less than the total of all your liabilities. Your family should not bear the burden of managing the Equated Monthly Installments (EMIs) of your loans. 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.
It would help if you kept landmark events in mind while ascertaining the sum assured. For instance, if you plan to get married and start a family, you will have extra responsibilities on your shoulder. As the cost of education is rising day by day, you must plan accordingly while opting for the sum assured.
Your life goals will change with age. For instance, when you are young and unmarried, you will have minimal financial responsibilities. However, when you have a wife and children, your obligations increase. It is because you need to 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 age is between 25 to 35, you can select a sum assured, which is at least 20 times your annual income. When you are aged between 36-45, you can opt for a sum assured, approximately 15 times your yearly income. When you are 46 to 55, choose a sum assured, which is 10 times your annual earnings. Remember to add the total of your outstanding loans to the sum assured, irrespective of your age.
Now when 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.