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Term Insurance 637 views February 9, 2019
“How much insurance cover do you need?” has a direct bearing on how much worth your life is. If you are the sole breadwinner of your family, then answering this question while buying term insurance becomes more important. The purpose of investing in a term insurance plan(s) is to ensure an appropriate cover against possible loss of income in the event of unfortunate events like death, disability, and disease. It is difficult to come to terms with the death of a loved one, more so when death succumbs the dependents to financial distress.
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While opting for an appropriate amount of term insurance cover, you must not rely on others’ judgment for the same. This is because the amount of life cover or sum assured that would suit your friend’s requirements may not be enough to bear the financial responsibilities of your family. There is no harm if the amount of sum assured exceeds your nominee(s)’ requirements. But, what if the amount of term insurance cover you have paid for falls short of your family’s requirements? The solution to it lies in choosing the right amount of coverage that would provide necessary financial support to your family in case of any untoward event. The best term insurance plan would be the one that ensures the right amount of cover at the lowest premium rates for a given policy period in addition to other given conditions.
You may calculate the amount of sum assured either by filling in requisite details on the term insurance calculator or by simply gauging your family’s requirements in future by taking into consideration your current income, inflation rate, liabilities like home loan, other debts incurred, etc. In addition, you would need to include contingent expenses like the costs incurred on higher education or amount that would be required to spend on your children’s marriage.
Those fearful of numbers or tend to be evasive regarding decisions based on calculations must understand that there is nothing too technical about using a term plan calculator. In fact, the term plan calculator facilitates the evaluation of required monthly cover in the future that would enable determination of the quantum of life cover you must opt for. The amount of sum assured or death benefits protection can be arrived by:-
First, find out your family’s one-time expenses. These may include the extent of your outstanding debts, mortgages taken, personal loans yet to be repaid, the liability of education loans, ongoing home loans, premiums on family health insurance plans or critical illness cover bought, pending payments on credit cards, etc. Compute all these expenses to arrive at the total amount.
First list all the assets that your family has. Then, then add only those that your family would be willing to offset against the lump sum amount of your liabilities. These assets may include the estimated value of your stock portfolio, additional property, jewelry, fixed deposits, the amount saved in provident funds, etc.
Have you invested in any comprehensive health insurance plan that would pay for the hospitalization expenses and secure your family’s health and ensure a necessary treatment in the future? If your dependents are not covered under any family health insurance policy, do you have enough monetary provision to pay for exorbitant treatment charges in the future, if a need arises? With no health insurance policy in place, you will have to make a provision for possible medical expenses that may arise in the future.
Compare the assets that you have with the total liabilities that your family may have to bear in your absence. If the value of your assets exceeds your liabilities leaving them with enough amount to bear essential costs like amount expended on funeral or miscellaneous expenses that may arise in future, then it would be futile to buy term insurance. However, if your liabilities are way more than the assets you have earned or accumulated till date, you must consider the difference or shortfall (Net Liabilities) as the minimum sum assured so that your family members would not reel under the burden of loans and liabilities.
Certain expenses being a part of one’s daily life must not be ignored. These include prices of groceries bought, fees paid for children’s education (fees paid towards school or college education), electricity bills, utility bills, and others. Now find out these family expenses over the year by multiplying the monthly expenses by 12.
This is an important consideration that involves understanding of your nominees’ age, needs and earning capability. Calculate the number of years before which your children would start earning post your death. Also, do you have other aged members in your family who would need to be financially protected until their demise? These considerations among others would have to be evaluated based on hypothetical assumptions before arriving at the amount of financial coverage you wish to leave behind. So, if you wish to keep your family financially covered for 20 years after your death, all you need to do is to multiply your annual expenses calculated in Step 5 by 20. Add this amount to the net liabilities derived at in Step 4 to find out the approximate amount of sum assured.
However, instead of browsing online for the term insurance calculator, you may also consider choosing an insurance cover that would be approximately 15-20 times your yearly salary. For example, you earn an annual salary of Rs 3 Lacs. Then, you must aim for a minimum amount of sum assured to the tune of roughly Rs. 60 lacs.
Arriving at the right amount of sum assured is not enough. To ensure that the purpose for which you had originally bought term insurance is fulfilled, you need to select the right policy term or policy period. Opting for an inadequate policy term to save on premium payments will mar the sole purpose for which the term insurance plan was initially bought, while also depriving your dependents of the death benefits that they would need to make up for the loss of your income post your demise. Though the liability of premiums for a longer policy period may seem prolonged, it will ensure financial protection to your nominee(s) in the long run.
In case, the amount of premiums towards the life cover evaluated seems costly, you may opt to choose to cover your nominee(s) to the extent of minimum sum assured to avoid burning a hole in your pocket. However, if you can afford to pay higher premiums than calculated, you may choose a higher amount of sum assured to ensure a better lifestyle for your loved ones.
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