How Much Term Insurance Cover Do I Need in 2024?

Determining the appropriate amount of term insurance coverage is a crucial step in safeguarding your family's financial future. 

The question - "How much term insurance do I need?" is one that often arises when individuals are considering purchasing a term life insurance policy. 

It's important to evaluate and assess various factors carefully after which you can arrive at an informed decision regarding the ideal amount of term insurance coverage that will provide your loved ones with the necessary financial protection and support in the event of an unforeseen circumstance.

Term insurance is a type of life insurance policy that provides coverage for a specific period, known as the term. It is designed to offer financial protection to your loved ones in the event of your untimely demise during the policy's duration. 

Unlike permanent life insurance policies, term insurance does not accumulate cash value over time. Instead, it focuses solely on providing a death benefit to your beneficiaries if you pass away within the specified term. 

Term insurance offers a straightforward and affordable way to ensure that your family's financial needs, such as mortgage payments, education expenses, and everyday living costs, can be taken care of even if you're no longer there to provide for them. 

It provides peace of mind and security during the term, allowing you to protect your family's future and provide them with a safety net in times of uncertainty.

Deciding the right amount of insurance coverage is crucial to have the sufficient financial security you wish to provide your family. 

The coverage you choose today will decide the amount your family will receive in case of your unfortunate demise, and it will be the total amount your family would depend on for their finances. If you choose a low coverage, your family might struggle with the expenses considering the rising cost of living and inflation. 

On the other hand, selecting a very high coverage beyond your requirement might as well be a financial burden due to their high premium and might lapse if there is any default in premium payment.

Hence, it is crucial to understand how much term insurance one should take.

Choosing the most appropriate amount of life coverage is not easy and requires considering multiple factors. Here are the most important factors that can help you in deciding how much Term Life Insurance you need: 

• Future Financial Goals: With progressing life and changing lifestyle, our financial goals also keep progressing. Your current financial goals differ from what you may have 10 years later. The responsibilities multiply, and goals increase. Hence, it is essential to assess your future goals when deciding on your insurance coverage. 
  
• Annual Income: The basic premise behind any insurance is to replace the lost incomes that the policyholder might have earned if they were alive. This also considers inflation and the income rise. A rough idea for deciding the required insurance coverage is multiplying your current income by 25. However, this does not consider other factors and is just an indicative figure. 
  
• The Period of Coverage: The period you want coverage for is another factor that decides your coverage amount. You can determine if you want coverage till your earning years or till you believe your kids will be financially independent. You can also decide to have long-term coverage to ensure your spouse is financially secure even in retirement. 
  
• Age: The most vital factor that affects your Term Insurance coverage. As you age, your premium increases for a certain Sum Assured. Also, with age, increased liabilities and future goals add to the required financial coverage. 
  
• Liabilities: There are various kinds of liabilities that each one of us has, and they only keep increasing with age. There are regular household expenses, monthly bills, EMIs, rents, premium payments and rents. Not just that, there would be future liabilities like child education or marriage. 

In the case of the unfortunate demise of the family's breadwinner, the insurance proceeds must be sufficient to take care of the total financial liabilities of the family. Even in the absence of the policyholder, the family's lifestyle must not get hit. This is the basic premise behind deciding how much insurance a person needs.

Let's check out the most common methods used to answer the question: “How much term insurance should I buy”?

1. Expense Replacement

A method commonly suggested by most financial planners, the Expense Replacement method considers all the expenses of an individual, like day-to-day expenses, future expenses like children's education, marriage, financial requirements of dependents, loans, and debts.

After arriving at this expenditure figure, we deduct the present value of our savings, like investments and any other life cover. Here, we do not consider assets like homes and cars in the calculation since we want our family to keep using them as utility and not depend on their monetary value.

This final figure gives us an idea of the insurance coverage amount required by a person.

Illustration

To understand it better, let us consider an example of Mr Suresh, a typical 35-year-old professional who is the family's sole breadwinner. He has two kids, aged 10 and 4, a dependent wife and parents. His monthly expenses are approx. Rs.50,000. He pays a home loan EMI of ₹ 20,000 per month, wherein a loan of 70lac is still outstanding. 

Now, let us calculate how much coverage Mr Suresh needs: 

Step 1: Factor in the monthly expenses

In this case, the monthly expenses are ₹ 50,000 per month, which comes to ₹ 6 lac per annum. It is generally recommended to multiply this figure by 15 to have an idea of the future coverage, which, in this case, would be ₹ 90lac.  

Thus, Suresh's future household expenses requirement = ₹ 90 lacs. 

Step 2: Check the financial liabilities

Financial liabilities are the outstanding debts which in this case is the Home Loan.

Thus, outstanding financial liability = ₹ 70 lacs

Step 3: Assess your important future goals

Suresh has two kids who will have their education and marriage milestones in a few years, and Suresh needs to save for that. He understands this and has assessed an amount of ₹30 lacs for this requirement. 

He invests in instruments like SIP and recurring deposits towards the same goal. Suresh's untimely death would hit this saving and is an essential component of his coverage requirement. 

Corpus for future milestones = ₹ 30 lacs

Step 4: Factor in a retirement corpus for your spouse

Considering the lifestyle and the other requirements, decide what your spouse would need in their retirement kitty. In this case, Mr Suresh assessed that his wife would need at least ₹ 70 lacs as her retirement corpus. 

Retirement corpus needed for spouse = ₹ 70 lacs

Step 5: Factor in the existing savings

The savings you have built over the years are the corpus your family will inherit in case of your untimely demise. This amount includes all the savings across Fixed deposits, Mutual Funds, PPF, real estate, etc., and should be reduced from the coverage requirements. 

Mr Suresh has a total savings of ₹ 40 lacs across all his investment buckets, so,

Investments = ₹ 40 lacs 

2. Income Replacement

This method is based on the premise that the insurance proceeds must be sufficient to replace the lost earnings of the deceased breadwinner of the family. So, by this method,

Insurance Cover= Current Annual Income X Number of Years left for Retirement

It is a simple method that gives you a close idea of the required sum Assured, but a significant drawback is that it does not factor in the inflation, income rise, and the major expenses on the way.

3. Human Life Value

To find how much Insurance someone needs, the major factor widely used across the insurance industry is the Human Life Value or HLV. HLV, in simple terms, is the monetary value attached to a person.

It is the present value of all future income a person would expect to earn for their family. It directly indicates the financial loss a family would suffer in case of the untimely death of the family's breadwinner.

4. Underwriter's Rule

A common thumb rule for calculating the minimum amount of cover needed by a person, the Underwriter's rule states that the sum Assured = 10 x Annual Income. So, if your annual income is 10 lacs, you should have a life cover of 10 x 10 = 1 crore, i.e., 10 times the annual income.

While this formula has become widely prevalent due to easy calculation, it is believed to give a minimum figure as an indicator for the required sum assured.

Term Insurance is the best choice to protect your family financially, even in your absence. While we discussed many calculative methods to decide how much term insurance is needed, they provide just an indicative figure. 

The exact requirements keep changing depending on our current lifestyle and future priorities, and they should be correctly assessed by us periodically. 

Hence, it is always a good exercise to revisit your financial plans and coverage every five years and update accordingly.