With the current market’s ongoing inflation, purchasing a term insurance policy is one of the smartest steps to secure your dependents’ financial stability. It ensures your dependents shall never face any financial crisis, even if you pass away untimely. However, when it comes to selecting the right coverage you require, it takes a serious evaluation of several factors to determine. 

So, if you are wondering how you can do that, this blog is for you. Read on to learn tips and methods for selecting the right term insurance sum assured for you.

Different Methods to Calculate the Coverage of Your Term Insurance Plan

The following points feature a few interesting yet convenient methods through which you can decide the type of financial coverage you require in the long run:

• Human Life Value (HLV) Method

According to the Human Life Value method, you need to consider your liabilities, potential future income increase, all your investments and other related expenses to assess your financial stability. This calculation will eventually lead you to determine your expected financial requirements in the years to come. You can also use a HLV calculator online to determine your coverage.

• Income Replacement Method

The Income Replacement method requires you to multiply your current annual income by the number of years left for your retirement. This calculation will help you determine the sum assured you require to replace your lost earnings.

• Expense Replacement Method

Under the Expense Replacement method, you need to calculate all your usual expenses, financial goals and liabilities and deduct the present value of your investments. This way, the answer you get shall imply the financial coverage required from your term insurance plan. 

• Underwriter’s Rule

The underwriter’s rule is one of the most convenient methods to determine your coverage requirements. Under this method, you need to calculate a minimum of 10 to 20 times your present annual income to get the required sum assured.

What to Consider While Calculating Your Term Insurance Coverage?

There are a few crucial factors that you must consider before purchasing a term insurance policy. Considering these points shall help you determine the appropriate sum assured you require to fulfil your financial commitments in the future. 

• Number of Dependents in the Family

You must determine the number of people who are financially dependent on you. This will help you predict their potential financial requirements in the coming years, including their higher studies, marriage, etc.

• Financial Liabilities

You need to consider whether you have any financial liabilities, such as home loans, personal loans, car loans, or even credit card bills. These liabilities will pass on to your dependents in your absence, leaving them under a financial burden. Hence, the coverage should be enough to clear all such liabilities.

• Usual Expenses of Your Family

Your family’s usual monthly expenses, such as house rent, groceries, education, healthcare, etc., need to be considered to predict the amount your family requires to spend on their daily lives.

• Long-Term Financial Goals

You need to take into account any major expenses you have to bear in the future or expenses that usually require bigger financial commitments. These include sponsoring your children’s higher education, their marriage, buying a house, etc.

• Current/Potential Income

You need to consider your current income and potential future increments so that you can choose coverage that is 10 to 15 times your current annual income.

• Retirement Plans

You must consider the number of years left for your retirement. It is essential to determine the coverage that aligns with such financial planning since you shall not have a regular source of income once you retire from work.

• Health Conditions

If you have any pre-existing medical conditions, they will affect the premiums of your term insurance plan.

• Inflation

Considering that inflation lowers purchasing power over time, make sure to consider inflation as a major issue in determining the coverage you need.

• Age

Age is one of the major aspects of buying a term insurance plan. The earlier you opt for a term plan, the lower the premium you will have to pay. This way, you can aim for higher life cover at affordable rates.

Final Words

To wrap up, choosing the right term insurance coverage is as important as any other financial planning in your life. Selecting the appropriate sum assured requires a close assessment of your current financial scenarios and your family’s potential financial requirements. So, make sure to follow the tips and methods discussed in the blog to determine the right term insurance coverage for your dependents’ financially secure future.