You must check if the term insurance plan has sufficient cover to safeguard dependents. If not, make sure to increase sum assured in term life insurance plans.
Inflation especially medical inflation is on the rise. It means a rupee today is worth more than a rupee tomorrow. Let’s put this in numbers.
When Mr Kiran was single 5 years ago, he had a term life insurance policy with a sum assured of Rs 20 Lakhs. Now, he is married and has two children and believes this sum assured is not sufficient to meet the financial goals of his dependents, including parents. Mr Kiran badly needs to avail a new term life plan or increase cover under the old term life plan. (He basically needs to increase sum assured under the term life insurance plan).
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See Also: Why Buy Term Insurance for Your Family?
The following chart illustrates the sum assured for Mr Ravi who is 35 years old.
|
|
Mr Ravi |
Yours (fill the gaps) |
A |
Age |
35 years |
|
B |
Dependent members |
3 |
|
C |
Yearly income |
Rs 10 Lakh |
|
D |
Household expenses |
Rs 5 Lakh |
|
E |
Number of working years left (60 years – the current age of 35 years) |
25 years |
|
F |
Funds necessary to manage household overheads = E X D = 25 X 5 = 125 lakh |
Rs 125 Lakh |
|
|
Outstanding loans to be added if any |
|
|
|
|
|
|
G |
Home loan |
Rs 30 Lakh |
|
H |
Car loan |
Rs 5 Lakh |
|
I |
Funds required to repay the debts (G+H) |
Rs 35 Lakh |
|
|
Additional funds required for the family |
|
|
|
|
|
|
J |
Children’s education |
Rs 10 Lakh |
|
K |
Children’s marriage |
Rs 15 Lakh |
|
L |
Contingency funds |
Rs 8 Lakh |
|
M |
Total (J+K+L) |
Rs 33 Lakh |
|
N |
Deduct the value of existing assets (assumed) |
Rs 30 Lakh |
|
|
|
||
O |
Total insurance cover required (F+I+M-O) |
Rs 163 Lakh |
|
This is a simple calculation. Use the same procedure to compute the sum assured you require on your term insurance policy.
The concept of human life value is very simple. It helps calculate life insurance needs. Put simply, the future earnings are expressed at the current price. The desired sum assured can be computed using the Human Life Value calculator (HLV calculator). IndianMoney.com, a free financial education company, offers this customer-friendly HLV calculator.
If you are below 40, the sum assured must be at least 20 times yearly income. During the 40s, it should be 10-15 times yearly income; and during the 50s, the cover must be 5-10 times yearly income.
The calculations have to be modified a bit if your spouse is not working. Estimate funds she may require after the age of 60, pay attention to medical expenses, living expenses and so on. In this way, you can provide complete financial protection to the spouse. The calculations differ across families as preferences/needs are different.
See Also: How Much Term Insurance Should I Buy?
You must avail term life insurance with your first salary because of the following reasons:
See Also: How to Secure Your Family With Term Insurance?
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