It is now abundantly clear from the COVID-19 pandemic that purchasing a life insurance policy is one of the most crucial financial decisions one can make. After the outbreak, there was an increase in demand for life insurance policies. Term life insurance policies are considered to be the most cost-effective option since they provide the highest level of insurance coverage at the lowest possible price. The most basic type of life insurance is term policies, which pay out the entire amount guaranteed in the event that the policyholder passes away during its term. In the event that the insured individual lives out the term, there is no payment. However, look at the insurance from the perspective that it prevents future lifestyle disruptions or family goals.
But purchasing life insurance alone is insufficient. The secret is to ensure you sign up for enough money or “sum assured” to meet your family’s necessities in your absence. The sum assured you select now is based on the future worth of the objectives you have set for your family, not your current income.
In this article, we are going to educate you about the methods you can use to calculate the amount of sum assured apart from the term insurance calculator you should go for.
Methods to Calculate the Sum Assured Amount to Go For
When you set out to buy a term insurance plan online, you will come across a term insurance calculator given on the website. You can use this for a more comprehensive picture, or you can also use either of the following:
Human life Value
This approach takes into account a person’s human life value (HLV) or economic worth to their family. The idea mostly takes future income, expenses, liabilities, and investments into account.
To ascertain the insurance needed under the HLV approach, you must take into account your goals, predicted future responsibilities, income, and expenses. This approach is advised since it provides greater transparency while accounting for inflation.
Determine the cost in today’s rupee value if your objective is to maintain your family’s current lifestyle in the future. This will help you in determining the appropriate level of coverage. The majority of insurance companies support this approach, and many of them have an HLV calculator available on their websites.
Income Replacement
This approach makes the assumption that life insurance will cover the breadwinner’s lost income.
Using the formula insurance cover = current yearly income x years till retirement is one of the easiest methods to get your income replacement value.
For instance, if you are 40 years old, make ₹15 lakh a year, and intend to retire at 60, you will require ₹3 crore in insurance (₹15 lakh x 20).
Expense replacement
Financial experts advise using this strategy, which requires people to figure out their monthly household bills, debts, and long-term financial goals, including paying for their children’s education and supporting their parents financially. Your family’s complete financial needs are represented by the amount you arrive at. Subtracting the present value of your savings and existing life insurance is the next step. Assets like your automobile and the house you live in should not be included in your investment valuation, as your family will probably keep using them. You can estimate how much coverage you need by subtracting investments and insurance from your goals and costs.
Underwriter’s Rule
The general guideline for determining the minimum coverage required is to have a sum assured equal to ten times your yearly salary. Therefore, if your income is ₹10 lakh per year, you need to carry a life insurance policy worth at least ₹1 crore. Investment advisors contend that this approach does not provide an accurate picture as it has turned into a general guideline. Some experts argue that the minimum coverage ought to be at least 15–20 times your yearly salary.
The DIME Approach
This method considers additional specifics. DIME is an acronym for mortgage, debt, income, and education.
Debt
Include all of your debt, excluding the mortgage, with a focus on credit card debt.
Income
You need to multiply your income by the number of years you want to come up with income replacement.
Mortgage
Add the existing balance of your mortgage amount to the running total, if any.
Education
Are you a parent? Take into account the price of a college education, which might vary greatly. Take into consideration your child’s tuition fees, books, hostel fees and other miscellaneous fees.
The Sliding Scale Model
For the general public, another rule serves as a term insurance calculator. Here, the age of the policyholder is considered. This model’s fundamental tenet is that the multiplier—the number by which the annual income is multiplied—increases with the age of the policyholder. For policyholders who are in their 20s, the multiplier in this instance is 20. This multiplier rise is due to the fact that younger policyholders would have income gradation over the course of their lives, and the term insurance plan coverage should take the improvement in salary into consideration. In a similar vein, an older policyholder must have cleared their financial liabilities, if not at least most of them.
The Relief Insurance Model
According to this, the policyholder’s term insurance plan coverage should be five to ten times their current yearly pay. The policyholder should, therefore, choose a term insurance plan that is either Rs. 30,00,000 (Rupees thirty lakhs alone) or Rs. 60,00,000 (Rupees sixty lakhs only) if the policyholder makes Rs. 6,00,000 (Rupees six lakhs only). The goal is to make sure that the nominees are financially secure during their time of bereavement and that their financial obligations can be satisfied.
Conclusion
You can also look at advantages of life insurance for more info. It’s possible that your current cover looks insufficient because of an increase in your life value, a change in the value of your aims, or both. You can also use the term insurance calculator given on the website to figure out the same. If so, purchase a new policy or consider increasing your coverage amount. There is a provision in the life insurance policy where you can increase the coverage at various phases of life. It makes complete sense to purchase a second policy if your life insurance provider does not give this feature. However, keep in mind that this could also result in an increase in the premium.