How much term insurance cover should you buy?

Many among us think of buying term insurance as a reminder of our mortality and therefore we put off that idea. Well, that’s not the whole point. The actual point of purchasing life insurance is securing the future of our family, especially when we are not there anymore with them. Another confusion that often troubles people is the cover that they need for their family from a term insurance policy.

Before figuring out the amount of money that we can get through a term insurance policy, let us first understand what term insurance is.

What is term insurance?

Term insurance is a type of life insurance policy in which you pay a monthly or quarterly or yearly premium for certain tenure. In case you pass away within the tenure, the sum assured will be paid to the beneficiary of the term insurance policy. The best thing about this policy is that your family will be able to get higher coverage for a lesser premium. However, if you survive through the tenure, you will not get the sum assured.

Now that we understand what a term insurance plan is, let us discuss the coverage that your family would need. To understand it properly, let us illustrate this with an example.

Amit is a 34-year old man, who lives with his wife, a 5-year-old child, and his parents. The expense of the family is Rs. 60,000. Amit also pays Rs. 30, 000 every month as EMI for a housing loan of Rs. 70 lac, which is still outstanding. Now let us calculate the coverage that Amit needs for his family in an event of his untimely death. Here are the five steps:

Step -1: The monthly expenses of the dependents

The monthly expense of Amit’s family is Rs.60, 000, which is around Rs. 7.2 lac in a year. The coverage should be 10-15 times the annual expenses of the family. Seeing the growing cost of education, healthcare, and higher inflation, the coverage should be somewhere around Rs.1.08 crore.

Step -2: Evaluating the bills

One of the worst things you can leave your family with is debt. Amit has to pay off an outstanding loan of Rs. 70 lac. This means the coverage should be enough to pay off this amount.

Step-3: Assessing life goals and events

Amit has a 5-year-old child and he wants the kid to get the best of education and settle in life. He already has taken a SIP and pays Rs. 7000 every month, which is supposed to pay back Rs. 20 lac in the next 15 years.

Step- 4: Retirement corpus of wife

Amit also needs to leave a corpus for his wife so that she can manage her life in the retirement years. Amit thinks his wife would need at least Rs 80 lac in her life after retirement.

Step – 5: Existing wealth

Amit already has some existing wealth which includes the fixed deposits, provident funds, mutual funds, etc, which can easily be accessed by his family on his untimely demise. Let us assume that all these make Rs.30 lac.

Now if we add all these figures, we can assume that Amit’s family will need at least Rs. 2.48 crore of coverage.

This is just a rough calculation of the coverage amount that a family may need if their monthly expenses at present are around Rs.60.0000. However, it all depends on the priority of the family, the number of members they have, and the stage of life the insured is in.

There are several term insurance plans offered by different companies. You can visit the IIFL Insurance website today to compare as many as possible and choose the one that you find is suitable for your family’s needs.

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