How To Calculate Term Insurance Cover?

The covid pandemic last year in 2020 brought about many uncertainties in the life of the common man. Apart from job losses and pay cuts, many families suffered the loss of loved ones directly from the pandemic. This loss not only caused emotional stress, but it also affected the surviving members financially because in many cases it meant the loss of primary/only source of income and a huge dent in their savings.

These uncertainties highlighted the benefits of Life Insurance cover in the midst of a financial crisis. Term insurance is one such financial safety net that surviving members can rely on. This helps them meet their financial obligations such as loan repayments, school fees for children, and even basic rent and utility costs.

As per a survey conducted by the policy bazaar(Insurance Aggregators), there was a 70% increase in the purchase of term insurance in the age group between 25 to 35 years. So, in gist the pandemic made us realize that along with Food, clothing, and shelter, the new and 4th basic need today is having an adequate life cover. When I mean adequacy, it means the life cover needs to be calculated based on:

1. Age
2. Liabilities ( It is very important to have a sufficient life cover if you have taken any kind of loan to safeguard your hard earned savings)
3. Existing health condition
4. Life stage cycle(Unmarried, just married, married with kids, married without kids)
5. Existing Life cover(Indians are assured of only 8% of what may be required to protect a family from financial shocks following the death of the earning member. Lack of adequate cover in such situations makes people prone to high financial instability(as reported in Business Standard).

Thumb rule method: This method gives a bare minimum cover that a person needs to have at any given point in time. It is usually calculated as10 times the annual income. Ex: If the annual income is 12 lacs, the cover provision should be 12 lacs multiplied by 10 which is 1.2 crores.

Expense method: Here, one needs to calculate all the cash outflow or expenses that are generally incurred in a month. This amount is then multiplied by a factor of 200 to derive a life cover. Ex: If the expense(Including EMI’S, school fees for children, bills, transportation, groceries, and any other)is around 70 k, the cover required would be 1.4 crores (70 k multiplied by 200).

In a nutshell, the life cover needs to be reviewed periodically as per the change in your income structure, major milestones, and lifestyle pattern. Just like your annual medical check-up gives a clue to what is happening inside the body, a financial check-up reflects your cash inflow and outflow.

Remember by taking life insurance you are creating the money for your family expenses in case of any uneventful circumstances.

For more personalized info on financial planning, kindly mail me at peerusoumya@gmail.com or visit my page https://www.facebook.com/smartfinancialplanning.soumya/

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