To secure the financial future of your family, it is essential to select the appropriate amount of term insurance. You can read my previous post – what is term insurance and understand the necessity why you need it.
We will understand why It’s critical for Indian middle-class families to take term insurance and what number of variables should be taken into account, including income, spending, debt, and long-term objectives. We’ll break down how much term insurance you should get depending on your income and costs in this extensive guide.
I am also a middle class person who has taken term insurance considering different parameters that I discuss in detail.
Understanding Term Insurance
Term insurance is a type of life insurance or life cover that provides coverage of your life without any bonus benefit. If the policyholder passes away during this term, the beneficiaries receive the sum assured.
Since, it does not give any bonus benefit and beneficiary receives a sum assured when a person passes away, it costs less than life insurance. You can easily purchase term insurance with minimum payment depending upon your age.
So, the next question arises, How to calculate how much term insurance you need and your family needs after your absence.
Calculate Your Term Insurance Needs
1. Income Replacement
Multiplier Method: A common rule of thumb is to get a term insurance policy worth 10 to 15 times your annual income. This ensures your family can maintain their lifestyle if you are no longer there to provide for them.
For example, If your annual income is ₹6,00,000, then the income replacement amount should be: ₹6,00,000 x 15 = ₹90,00,000 or ₹6,00,000 x 10 = ₹60,00,000
2. Based on your debts or liability
It’s important to cover all your outstanding debts and any immediate expenses that would arise in your absence. Let’s calculate your debts –
- Home Loan: ₹30,00,000
- Car Loan: ₹5,00,000
- Personal Loan: ₹2,00,000
- Funeral Expenses: ₹2,00,000
Total debt for important expenses: ₹30,00,000+₹5,00,000+₹2,00,000+₹2,00,000=₹39,00,000
It’s just an assumption. You can calculate accordingly.
3. Ongoing Living Expenses
Calculate the amount needed to cover your family’s living expenses. Assume you want to cover living expenses for the next 10 years.
- Annual Living Expenses: ₹4,00,000
- Total expenses for 10 year: ₹4,00,000 x 10 = ₹40,00,000
4. Future Financial Goals
Consider future financial needs such as your children’s education and your spouse’s retirement.
- Education Fund for 2 children: ₹10,00,000 each = ₹20,00,000
- Spouse’s Retirement Fund: ₹20,00,000
- Total Amount required for future betterment: ₹40,00,000
Now, we total the amount = ₹90,00,000 + ₹39,00,000 + ₹40,00,000 + ₹40,00,000 = ₹2,09,00,000
Or
₹60,00,000 + ₹39,00,000 + ₹40,00,000 + ₹40,00,000 = ₹1,79,00,000
From this analysis, we can conclude that you may need term insurance of ₹2,00,00,000 or ₹1,50,00,000.
But, there is one more thing you can consider. When you take a home loan, lenders also add life insurance on it to secure their home loan amount in your absence and your family should not feel burden. If you have availed this feature, you can consider buying a lower term insurance amount.
You can consult with an expert, if still confusion persists. There is no harm in taking suggestions before investing as it is your hard earned money. You can also take into account your other investment, other passive income, if any is there.
Conclusion
For a middle-class family, determining the right amount of term insurance involves considering income replacement, debt coverage, living expenses, and future financial goals. Using this structured approach, you can ensure your family’s financial security.
By following these guidelines, a middle-class individual earning ₹6,00,000 annually might need around ₹2,00,00,000 in term insurance to cover all bases adequately. I recommend not to take abrupt decisions on insurance advisors or any agents. Think many times and evaluate your earnings, expenses, situation, read their terms and conditions.
