Term Insurance: The Superhero Cape Your Loved Ones Deserve

Life is a roller coaster, full of surprises at every turn. While we can't predict what's around the bend, we can make sure we're ready for whatever comes our way. Think of term insurance coverage as a safety net for your loved ones. It's like having a parachute that opens up if something unexpected happens to you. This financial safety cushion ensures that your family can stay secure, even during life's toughest moments.

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How term insurance works?

A term life insurance policy is the simplest, purest form of life insurance. You pay a premium for a set period, usually spanning from 5 to 30 years. If you pass away during this period, a cash benefit is paid out to your chosen beneficiaries, providing them with financial support towards their expenses and loan obligations. Term policies do not accumulate cash value, provide no payout once the term ends, and offer no benefits other than a lump sum payout in case of death. To maintain simplicity, the majority of term policies follow a "level premium" structure, meaning your annual or monthly premium remains constant throughout the entire policy term.

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How much coverage is enough?

The coverage provided by term insurance can vary based on individual factors like income, lifestyle, expenses, and debts. This amount should be enough to address future requirements and offset the impact of inflation.You should carefully assess all your family's future requirements, whether it's outstanding debts or potential medical expenses, to determine the appropriate coverage needed for your term plan.

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Let's assess the necessary coverage for Shiv, aged 45, who resides with his wife Parvati, aged 40, and their 15-year-old son, Ganesh. Ganesh is currently in school with three more years of education remaining. Shiv intends to secure sufficient coverage to provide for Ganesh’s future college expenses and marriage, in addition to covering essential household expenses for Parvati, and paying off their outstanding home loan, considering a life expectancy for the couple until age 85.

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We have assumed that the couple's existing assets will cover the down payment needed for the house. Based on the illustration, Shiv requires a term insurance policy with a sum assured of 1.78 Crores. It's worth noting that one should verify whether the outstanding home loan already includes some form of term insurance that the lender may have required Shiv to obtain when he received loan approval.

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Another common method used to calculate the term insurance is Income Replacement Method. Typically, life insurance companies use a rule of thumb to calculate human life value, which involves multiplying your income by 5 to 30 times. This multiplier isn't random - it's based on a formula representing current income multiplied by the expected number of years the insured individual will earn an income. For instance, Shiv, who is 45 years old and wants to retire by age of 60, it's recommended to get coverage that's around 15 times of his yearly income.

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With term insurance as your trusted companion, you can navigate life's uncertainties with confidence, knowing that you've fortified your family's future against any unexpected twists and turns. Just make sure that the sum insured is properly calculated so it can realistically support their needs.

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