Is there any plan on your part to buy a term life policy? If yes, then ensure that the proper coverage amount is selected. You do not want a situation where your family falls into a major financial bind due to your untimely demise. Term insurance is a good option to keep them secure in such situations. Yet, the coverage amount that you select should be sufficient to meet all your loved ones’ requirements down the line.
Term Life Policy Coverage – How to Select the Right Amount?
There are a few steps involved in choosing a suitable coverage amount for your term life policy. Let us take a closer look at them below:
- First, calculate the amount that your family will require to meet household and other costs in the future. This should be done after taking inflation into account. For example, your monthly expenditure right now may be Rs. 50,000. In 20 years, assuming an annual inflation rate of 5%, the costs will approximately double, amounting to Rs. 1,00,000 per month. Over 30 years, the increase could be even higher, possibly tripling your current costs. Hence, you may need at least Rs. 1.2 crore to fund your family’s lifestyle for a minimum period of 10 years in case of your absence.
- Then, add the cost of higher education for your children to this amount, factoring in inflation. Education inflation can be higher than general inflation, so it’s advisable to account for this accordingly.
- The next step is to add your liabilities, i.e., loans and other debts. Also, consider any appreciating assets like property or investments which may help offset some of these liabilities in the future.
- Once you get the final figure, subtract your current savings and assets from the amount, considering both liquid assets and those that may grow in value over time.
The sum that you get will be your ideal coverage amount while purchasing a term life policy.
- Now, you should check whether you can afford this coverage amount in terms of the premiums that are payable. If yes, you can go ahead. If not, you can opt for the highest possible amount and explore if your insurer offers the flexibility to increase your coverage in the future through riders or a new policy, as not all policies allow for incremental increases.
Choose the Right Coverage Amount to Secure Your Family’s Future
While affordability in terms of premium payments is important, you should not compromise on the coverage amount. A high and sufficient amount will help your family cover all necessary costs and life goals without depending on others or worrying about falling short of funds at any stage in life. A general thumb rule is to choose coverage of at least 10-15 times your annual income, although this may not always be sufficient, considering inflation and the varying lifestyle needs of your family members. Hence, use the calculation methods mentioned above to work out the best possible coverage that you can afford to secure your family’s financial future. This will give you mental peace, knowing that your family will be safe even if you are not around.