In personal finance planning, the importance of a term insurance policy is indisputable. Buying a term plan is one of the most effective ways to provide a financial cushion for your family’s future needs. Term plans have the most affordable premiums compared to other life insurance products and are easy to understand for all.
While many insurance companies in India offer several term plans, and there is no dearth of choice, one of the critical questions you must answer while buying the policy is – how much term insurance coverage should I get? Most insurance experts recommend a simple formula, i.e., choosing a cover that is 15-20 times your annual income.
For example, if your annual income is ₹ 10 lakhs, you can consider getting a cover of ₹ 1.5 crore to₹ 2 crores. While this formula may guide you in the right direction in choosing the best term plan, the truth is there is no definitive correct answer for how much term insurance you can buy. You can choose the coverage as per your specific needs. We will discuss a few tips that will help you choose the right term insurance cover:
Household expenses
Your family may be used to living a particular lifestyle based on your income. Hence, it is paramount that you consider your family’s lifestyle and the total household expenses while choosing the right term insurance cover. The amount should be enough to help them maintain the lifestyle they are used to and fulfil the expenses without making compromises.
Liabilities
As you progress in life, you may assume a few liabilities like home loan, credit card bills, vehicle loan, etc., and in the event of your untimely death, the repayment burden may fall on your family members. To avoid such an unpleasant situation, it is advisable to choose a term insurance cover that is large enough to cover the liabilities.
Premium amount
When you buy term insurance, you may want to get a policy that offers high coverage. But, you must ensure that you can pay the premium for the policy you choose. Typically, term plans with high sum assured have a high premium. So, when you determine the coverage amount you need, ensure that the premium is affordable and fits within your budget.
Current age
Your age at the time of buying term insurance is a critical factor to consider while determining how much term insurance you may need. If you are young and in your 20s, you may not have direct dependents, and you can purchase a policy with a sum assured of ₹ 5 – 20 lakhs.
However, as you grow older and advance towards your 40s, you may have responsibilities of your spouse and children. Not to mention, you may also have a few liabilities at this stage. In such a situation, it is better to buy a policy with a high sum assured of 50 lakhs to 2 crores or more as per your specific needs.
Irrespective of the sum assured you choose, it is advisable to purchase the policy at a young age, as you benefit from a lower premium.
Final Word
Now that you know the essential tips to choose the insurance cover, do your due diligence, and buy the right term plan.
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