CALCULATING YOUR TERM INSURANCE COVER
10. How much term insurance cover should I have?
· Life insurance is meant to provide the dependents of the policyholder with enough money to replace his income in case he dies.
· Your life insurance must take care of
o The basic expenditure that your family will incur
o Major expenses like education and marriage of children, and
o Other liabilities like outstanding loans.
· Rule of the thumb is that the term insurance policy's compensation cover should be:
Your Outstanding loans
minus
Your existing insurance cover, if any
plus
8 times your annual income (or 20 times your annual expenses).
· Buy term insurance online from a trusted insurer who charges the least premium.
· Don’t look at other policies until you have a term cover in place.
11. What are the steps to calculate your term insurance need?
- Know your family income/expenses
- (a) = Your monthly income
- (b) = Multiply (a) by income % you wish to cover (75-80%)
- (c) = Spouse’s monthly take-home pay, if any, including PF benefits
- (d) = Monthly shortfall for surviving spouse (b – c)
- (e) = Multiply (d) by 12 to annualize the amount
- (f) = Multiply (e) by the number of years the spouse and family will need the replacement income (this period goes down as you age)
- This (f) is your Current Family Expense Fun
- Know your family’s future needs
- Current Family expense fund as per (f) above
- Child care
- Emergency / Contingency fund
- Home loan pay-off
- Debt pay-off
- Retirement fund
- Other needs
- Total of above is your Total Future Family Requirement
- Know your current assets
- Cash / Savings
- House (current value minus the outstanding loan)
- Investments (stocks, bonds, mutual funds, others)
- Retirement plans (Provident Fund, Public Provident Fund, pension, others)
- Current life insurance, if any
- Other assets
- Total of above is your Total Current assets
- Know your Final Term Insurance Need
- Total Future Family Requirement (2) – Total Current assets (3)