Insurance
•02 min read
Life is utterly unpredictable, and you never know what curveballs it can throw your way, hampering even the most well laid out plans. This is where term insurance steps in, offering a protective shield for your loved ones’ futures. It offers them financial security in your absence, for all their future needs and goals.
To ensure your loved ones have adequate financial protection, it is important to choose the right cover amount. Let us under what this means and how you can decide on a cover amount that fits your and your family’s preferences and needs.
The cover amount, under a term insurance plan, is the amount of money your family will get in your absence. This sum will help them tackle financial needs, like:
Future goals, like children’s education and weddings, real estate investments, and more.
Any pending debts and liabilities.
Day-to-day expenses, like groceries, utility bills, medical expenses, etc.
There are a variety of methods that can help you arrive at the right cover amount. Here is a handy guide:
All you need to do is multiply your current income by 10. This will give you the amount that you will need over the next 10 years to keep your family secure. You can use this as a baseline for your term insurance cover amount.
For instance, if your annual income is ₹5 lakh, you will need ₹50 lakh (5 lakh x 10) to keep your family financially afloat for the next 10 years. So, your cover amount will be ₹50 lakh.
This method factors in all facets of financial security, like your earnings and savings, family’s future goals, any pending debts. It gives you the difference between the money you are obliged to give and the money you already own. This difference is the cover amount you should choose.
Let us understand this concept with a simple formula.
Cover Amount = Earnings + Goals + Debts – Savings
For instance, Rohit, a 35-year-old, lives with his spouse and child. He plans to buy term insurance to secure his family’s financial future. Let us look at his financial profile to assess the right cover for him.
Financial Profile Components | Details |
Earnings | ₹10 lakh per year, which is enough for his family’s living expenses. For the sake of simplicity, let us imagine he will retire at 60 and earn ₹2.5 crore till then. |
Goals | He plans to give his child a top-notch education and a grand wedding as well, which will cost around ₹50 lakh. |
Debts | He has a home loan of ₹10 lakh. |
Savings | He has saved up ₹10 lakh till now. |
So, Rohit’s cover amount = Earnings + Goals + Debts – Savings
= 2.5 crore + 50 lakh + 10 lakh – 10 lakh
= ₹3 crore
Under this method, you multiply your current income with the number of years left till your retirement, give you the cover amount that will help your loved ones deal with expenses, while maintaining a comfortable lifestyle.
For instance, if you earn ₹10 lakh annually and plan to retire in the next 30 years, your cover amount should be ₹3 crore, as per this method.
The right cover amount is entirely dependent on your and your loved ones’ financial needs and choices. It is super important to understand that while these methods may be effective, figuring out your term insurance coverage requires a careful evaluation of your financial profile and your family’s requirements in your absence. Make sure you consult a financial advisor to make the right decision.
