Who Should Buy a Term Insurance & How to Calculate the Cover Needed – Do not over-insure yourself

Not everyone needs life insurance or a term plan.

There are only two main situation in which you should buy a term plan:

1. There are family members who depend on you for their expenses and other needs
2. You have large loans like home loan, education loan etc., or are planning to take such big loans in the future

In simple words, ask yourself this question – “Will my family suffer badly money-wise if I disappear tomorrow?” If the answer that comes to your mind is yes, then you should consider buying a term plan.

How much life cover you should buy?

You can use the “need-based method” to calculate the life cover needed. It is the most logical method rather than using industry standards like 10-15x annual income, next 5 years’ CTC and so on. These industry methods often lead to over-insurance or under-insurance.

This is how it works.

1. Calculate the time till your retirement in years. For example, if you are 30 years old and intend to retire at the age of 60, you have 30 years till retirement.
2. Calculate your annual expenses (not income) today and use it for computing the present value of your future expenses. You can use the PV formula in Excel, assuming the inflation rate of 7% or any other rate you feel is relevant. And then decide a discounting rate which is nothing but a post-tax rate of return your family will earn in case of your demise. Be conservative here and use 7-8% but not more than that.
3. Once you have the above number, add the below values:
   • Your outstanding loan amounts, if any
   • Value of all the future goal amounts for your family like 10 lakh for sibling’s wedding, 25 lakh for child’s education and so on
4. Once you have added all the above, subtract any of your existing investments from that number. DO NOT subtract your residential home or your business place from this number. But any property bought from investment standpoint can be subtracted.

That’s it. Those are all the details you need to arrive at a logical and fairly accurate life insurance/term plan cover needed.

You can use the below template which I have prepared to quickly calculate your required life cover amount.

There are many other factors to consider while buying a term plan like which riders to add, what the premium payment term should be, till which age to buy the insurance, and if you should buy only one policy or multiple policies. But estimating your cover is the starting point, which I wanted to cover through this post.

Hope you find this helpful. Let me know in the comments, and don’t forget to share with someone who is confused or planning to buy a term plan.

And if you need any help deciding on buying a term plan, you can get in touch with me on WhatsApp by clicking here.

Thanks for reading,

Prathamesh

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