Home Featured How to choose the right coverage amount for your term insurance? Assess through these 4 factors

How to choose the right coverage amount for your term insurance? Assess through these 4 factors

by BankingTricks Desk

Your family is financially secure while you are away thanks to term insurance. A type of life insurance policy called term insurance provides coverage for a predetermined time. The cover amount is given to the nominee in the event that the life insured passes away within the policy’s term. In the event of the insured’s death or disability, it provides the family with financial stability.

 You can purchase term insurance if you want to ensure that your family won’t experience financial hardships while you are away. However, it is typically seen that the main concern when purchasing insurance is how much cover we need to take? For this, experts have offered numerous formulas. In this article, we will share some tips to choose the right coverage amount for your term insurance.

The human life value concept

The entire income a person can make while working throughout his life is determined by the Human Life Value (HLV) concept. The predicted inflation rate is then used to discount it. In other words, the person’s future income is estimated using the current price. This amount is subtracted from the cost of the individual in order to calculate their economic contribution to the family.

Take X, for instance, who is 40 years old and makes Rs 10 lakhs each year. He uses 2 lakh for personal purposes and his family receives the remaining Rs. 8 lakhs. The economic worth of X in this case will be 8 lakhs. In other words, his family will still want 8 lakh rupees every year even if he isn’t there. In light of this requirement, you ought to pick a term insurance policy.

Concept of income replacement value

Read more: 5 reasons why we must get a health insurance in early 20s

Based on your yearly salary, this is a simple formula to determine how much life insurance coverage you require. The multiplier of your annual income plus the number of years you have left in retirement, then, determines the amount of insurance that is necessary. i.e., required insurance coverage is equal to the annual salary times the anticipated retirement age.

Underwriters thumb rule

According to this, the insurance payout should be multiples of annual income adjusted for age. For instance, people between the ages of 20 and 30 should obtain life insurance coverage equal to 25 times their yearly salary. While those aged 40 to 50 should have life insurance coverage equal to 20 times their annual income.

Keep in mind your loans

This should also be considered if you owe money on a loan or other obligation. If you have a house loan of $50,000 in such a case, it should also be covered by the term insurance policy. The insurance coverage should be chosen with your other debts or loans in mind if you have any.

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