How much Term Life Insurance Cover do I need? | Online Insurance coverage Calculator

With increasing financial awareness, people have become very eager for Life insurance policies irrespective of Endowment Policy, Money Back Policy or Term insurance plans at an early age.

Term insurance plans offer an assured sum to the nominee in the case of uncertain demise of the policyholder. In other words, term insurance policy provides financial security to a policyholder. This policy becomes very much beneficial for the person who is the only bread earner of the family.

But one of the frequently asked questions is that what is the Insurance Coverage Amount do I need? How much Term Life Insurance cover should I buy?

In this column, we will give you step by step guide to what insurance coverage amount you need.

How much Term Life Insurance cover should you have?

There are different methods of calculation to arrive at the required Life Insurance sum assured, namely ;

  • Expenses Replacement Method : It is a series of calculations, which completely depends on your lifestyle and expenditures. (We are going to discuss on this in detail..)
  • Human Life Value Method : Most of the insurance companies and web aggregators provide HLV or Human Life Value calculators online to help you calculate how much Term Insurance cover you need.
    • This calculator works on a simple formula of time value for money.
    • Basically, it’s a present value of all the future income that you are expecting to earn in rest of the years till you retire. 
  • Income Multiplier Method : Using this technique, you need to multiply your income by a factor based on the age group you belong to. While using the income multiplier, it is prudent to reduce your expenses from your Income and then use the multiplying factors.
    • For people in 30-40 years bracket, multiply your income by a factor of 15 for minimum insurance value and by 20 for maximum insurance value.
    • However, a simple thumb rule is 10-12 times your annual income, irrespective of your age. 

In this post, let’s use the ‘expenses replacement’ method and calculate the approximate life insurance amount required by you..

In order to calculate the insurance coverage amount you should buy, kindly consider the following points;

  • Calculate the future monthly expenses in the light of current monthly expenses taking into the consideration of current inflation.
  • Consider the current outstanding debt payments either it is of short span of 5 year or long span of 20 years.
  • Calculate the future expenditure in lieu of several obligations such as education cost of your children and marriage of your daughter if you have any.

Calculate your Family’s monthly expenses

Let’s calculate the desired corpus you need to accumulate in case of untimely demise tomorrow on the below parameters;

  • Expected monthly income your family will need to meet Expenses in your absence.
  • Assume certain rate of Inflation and
  • For how long would this Income required by your Family (no of years)

Based on these inputs, we need to calculate the future value of projected monthly expenses.

For example : You would like to provide for Rs 20,000 pm at an expected inflation rate @ 6% for the next 30 years. The future value of all these payments would be around Rs 1.89 crore.

(Related Article : How to calculate the Future Value of investments using MS Excel?)

Current outstanding debt payments

In order to calculate the insurance coverage amount you need to consider the outstanding debt payments.

Suppose, you have taken an Unsecured Loan like a Personal Loan of Rs 10 Lakh, consider it for calculating life cover.

If you have a taken a Secured Loan ie Home Loan with adequate Mortgage Insurance and/or assigned Life insurance policy to it, you may ignore considering the outstanding home loan amount in the calculations.

The future expenditure in lieu of several obligations

Suppose you are 30 years old and you have got one son. So, as a father it is your duty to secure the future of your child.

Let’s say the higher education cost in today’s value is Rs 20 lakh, then assuming an inflation rate @10%, the projected future value of this cost after 10 years will be around Rs 52 lakh.

The formula to calculate for Future Value (FV) is as below.

FV = PV * [ (1 + i)^n ]

You can consider this Rs 52 lakh in your calculation. Alternatively, you can arrive at the required corpus to accumulate Rs 52 lakh at an assumed Return on Investment.

You need to now have Rs 24 lakh which can be invested at 8% to get Rs 52 lakh after 10 years from now.

So, you can consider Rs 52 lakh or Rs 24 lakh in your calculation.

Total amount need i.e. to repay the Personal loan, education cost of child and household expenses in the upcoming 30 years;

= Rs. 1.89 cr + Rs 10 lakh + Rs 24 lakh = Rs 2.23 cr.

You can deduct any existing life insurance cover and accumulated savings from the above amount.

For example : Let’s say you have an existing life insurance policy for Rs 23 lakh then your required life insurance cover would be Rs 2 crore.

You can get this Rs 2 crore life cover through a Term insurance plan which is the best and cheapest form of Life Insurance. The approximate premium for Rs 2 cr Sum assured can be in the range of Rs 20,000 to Rs 30,000 per annum (for a 30 year old male).

Term insurance plans provide a high life insurance amount (subject to Insurer’s under-writing rules). For example, if your annual income is 10 lakh, then you can take a Life Cover of up to 1 crore.

You may also download above ‘online Term Insurance calculator’ from this link….

Points to consider while buying a Term Insurance plan

Points to consider when buying a Term Life Insurance plan step by step guide pic
How to buy best Term Life Insurance plan?

The insurance penetration in India is very low and most of us are under-insured. Hence, it is very important to buy adequate life cover through Term insurance plans.

So, which is the best Term Insurance plan to buy? – You may take a term plan from any insurance company of your choice, it should not be of any issue. But do disclose all the required information in the proposal form accurately and honestly, that’s it!

“As per the recent amendment to Section 45 of the Insurance Act, if your policy is 3 years old, no matter what happens, the life insurance company will not be able to deny the claims. So, your life insurance company has only 3 years in hand to reject the policy based on any mis-representation or mis-statement. Once three policy years are completed then the life insurance company has to settle the claims and can not reject them.”

Kindly note that the calculation of term insurance is not a one-time activity and one must revise them periodically.

This article has been co-authored by Jharna Majee of Capitalante & myself (Sreekanth).

About the Co-author

Jharna Majee capitalante

Capitalante was founded in April 2018 by a Veteran Financial Planner and Income Tax Cadre. Jharna Majee, Financial Planner & Sabyasachi Majee, Income Tax Cadre are the persons behind Capitalante, a Financial Education Blog, with a focus to share the knowledge on Stock market, Mutual funds, Insurance, Financial Planning, Tax Planning, Income Tax, Goods and Service Tax and different kinds of matter related to investment & Personal Finance that will make you financially literate.

Continue reading :

  1. Top 5 Best Online Term Life Insurance Plans 2020 | Comparison & FAQs
  2. IRDA Claim Settlement Ratio 2017-18 Data | Top Life Insurer 2019
  3. Life Insurance Endowment Plan Return Calculation | Do-it-yourself guide!
  4. The importance of numeracy in becoming Financially Literate!
  5. Calculate how much you need to invest for your Kid’s Education
  6. If Life is unpredictable, INSURANCE can’t be optional

(Kindly note that Relakhs.com is not associated with Capitalante. This post is for information purposes only. This is a guest post and NOT a sponsored one.)

(Image courtesy of Stuart Miles at FreeDigitalPhotos.net)
(Post first published on : 25-February-2019)

  • Anant parmar says:

    I want to know one thing in detail. up to what age one should go for term insurance?
    60 or 80?

  • Maria Hayden says:

    A life insurance plan is very important nowadays because it helps in protecting our family from any problem or sudden cause.

  • Rutushar says:

    Hi Sree,

    I have taken two term Plan my Age is 38 year old.

    1. TATA AIA Rs. 50 Lac, 40 years with 10 year premium of Rs 16K
    2. MAX Life Rs 50 Lac + Addition accidental rider of Rs 25 Lac, 30 years with 20 year premium of Rs 8 K.

    Request you to please suggest the above Planning. Thanks.

  • Hemant Sharma says:

    Hello Sree,

    Do you recommend to buy a term insurance with the riders options available like Critical Illness cover and Accidental Death Cover or just a pure vanilla plan.

    Please advise.

    Thanks,
    Hemant Sharma

    • Sreekanth Reddy says:

      Dear Hemant,
      Advisable to buy a Term plan with just a basic life cover and buy stand-alone policies for Health Insurance / CI / Personal accident cover.

      • Hemant Sharma says:

        Thanks Sree for your response. What is the ideal age do you recommend as policy duration.

      • Hemant Sharma says:

        Thanks Sree. Currently, I am 43 years old and have twins of 12 years old. Please advise, what would be the ideal policy duration I should go for. Is it advisable to go until the retirement age or beyond that.

        Thanks once again.
        Hemant

        • Sreekanth Reddy says:

          Dear Hemant,
          The ideal age would be the retirement age, hence you may consider the policy term up to 60 years of your age.
          Assuming, most of your financial obligations get met by 60 years.

          • Hemant Sharma says:

            Hello Sree,

            Since, most of the insurance companies are now offering term insurance upto 99 years of age, why it is not recommended to go for a higher age. In case you are able to survive beyond 60 years of age, your kids may get an inherited amount from your insurance.

            Please advise.

            Thanks,
            Hemant

          • Sreekanth Reddy says:

            Dear Hemant,
            It is not a recommendation, it is a suggestion!
            When an individual meets all his financial obligations then life insurance cover may not be really needed. That’s the point!

            You can go for 99 years but premium will be calculated accordingly. Anyways, you can stop paying premium anytime if you feel that you do not require the insruance cover.

  • Optinsure says:

    Great post, I want to discover more about this subject matter in the future!

  • pooja kumari says:

    Thank for such a great informative article. Today I have a lot of new things in life insurance like terms and plans.
    Keep sharing much more information with us.!!!

  • Marek Roznerski says:

    Life policy is very important.
    Thanks to her, we give safety to our family and the future in the event of an accident.
    you have to be careful that the insurance company does not fool us.
    Nice article.
    Thanks

  • Amit Goyal says:

    In these days life insurance plan is very important for anyone and lots of life cover plan are available in the market but which one is suitable is for you is the must. And these things are explained in this blog very well, so thanks for the sharing this post. Good Job!

  • Manpreet says:

    Very informative article..People need to be aware about Term plans

  • SBS FIN says:

    Loved Your Insight About Life Insurance,
    Sreekanth Loved Your Article

  • Rutushar says:

    Dear Shree,

    Nice article, very good information.

    Please advice me about My Term Plan, I have taken two term plan (My age 39)

    1. Max Life : Tenure 35 Year : Premium 8K : Sum Ass 50 Lac + 25 Lac Accidental (75 Lac)

    2 TATA AIA : Tenure 40 Year : Premium 16K : Sum Ass 50 Lac, (But Premium to paid only 10 year and policy remain same for 40 year)

    Not taking tax advantage due Home loan & others

    Should i continue both or one. Please suggest

  • Pooja Datika says:

    Hi Rajan
    Thank you for such a good information. Great article

  • Rajan says:

    i would like to share a very important information here.

    75% of all Indians–are not covered by any form of life insurance, and an Indian is assured of only 8% of what may be required to protect a family from financial shock following the death of an earning member, according to our analysis of government data and industry data.

    Business Standard URL link : https://goo.gl/koFBck

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