Buying Term Insurance? Calculate Your Life Cover First


We live in times where buying insurance happens in just a matter of minutes. With a few clicks on the right website, you can get yourself a life cover and protect your family. Term insurance usually leads when compared to the other insurance options, thanks to its lower premiums and simpler design. Along with theeasy and hassle-free design, the tax benefits of term insurance and a range of associated riders also make these plans worthwhile for many consumers.

Although buying may be simple, it is important to know what a term insurance means and take the time to recognise your expectations from a plan and research the options. There are a couple of factors you should assess carefully before making a policy purchase. One of them is the ‘life cover’.

What is Life Cover?

When talking about insurance, life cover is the financial security that a plan offers for the life of the person insured. It refers to sum assured, which is an amount that is decided upon as a contract between the policyholder and the insurer. This is also the amount that the nominee can expect as the death benefit.

Thus, life cover often refers to the sum assured. This amount is a significant part of your policy. If you set an amount too low, it will not help your family the way you would like it to. In case the amount of sum assured is too high, the term insurance premium will increase proportionally, possibly burning a hole in your pocket.

Deciding the Right Sum Assured

The ideal sum assured would be an amount that helps your loved ones stay financially stable in your absence. It should suffice for their routine needs, short-term goals, long-term goals you’ve committed to, and even the liabilities you may leave behind. Thus, it is necessary to carefully calculate the sum assured instead of settling upon a vague amount.

There are at least two ways to reach a figure that is your ideal sum assured.

The first one is based on a simple principle that suggests an ideal sum assured being 10x your annual income. If you do not earn a regular income, an estimated value of your annual income should help. This method enables the life assured to offer at least 10 years’ worth of financial security to their families through the term insurance benefit. While 10x their annual salary may seem like a reasonable amount for some people, others may opt for 15x-20x their annual salary. These calculations do not have to be concrete, and the policyholder should calculate based on their needs and means.

Another method is via the calculation of your expenses, liabilities, assets, and financial commitments. Let’s assume that you are an employed individual in your late 20s, with parents, a spouse, and a toddler. All of these individuals,either partially or fully, depend on your financial means. You may also have a new car loan that you are paying off and are expecting to do so for the next seven years.

One of your major financial commitments in this scenario would be the education of your child. Others could be helping run the household or the health concerns of your parents that you’ve been financially helping with (if any). To reach a sum assured amount that is practical in this scenario, you can start by calculating the expenses. Add the estimate to your routine household expenses, the amount you will need to pay your loan off, and the estimated school fees for at least the first few years for your child.

Then, if you have any assets that will help your family, subtract those from the total expenses. You will now have a value of sum assured that can help your family.

Can You Afford Your Life Cover?

Once you reach a sum assured amount through either of the methods mentioned above, you will also need to figure out whether you can afford the term insurance premium for the amount. An easier way to do this is by using an online term plan premium calculator. You can input your sum assured, choice of premium frequency, and the term duration you desire, and your personal details as required, into these calculators. This will give you an idea of how much you will need to pay to get the life cover you want.

Term insurance plans are one of the more popular plans among most demographics, mostly owing to how no-frills and hassle-free these are. Even though they seem simple, the features they offer may make it worth your time, especially if you choose with discretion.

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