Quantifying the Required Amount of Term Life Insurance Coverage
In the bustling world of modern finance, one question stands out for many individuals: How much term life insurance coverage is necessary? For Akshay, a 35-year-old working professional, this question holds significant importance, given his outstanding home loan amount of Rs 70 lakh.
When it comes to term life insurance, a popular number for coverage is Rs 1 crore. However, it's crucial to calculate the correct term insurance coverage based on individual needs. To do so, consider factors such as future household expenses and liabilities.
The key factors to consider when calculating the correct term insurance coverage include income replacement, debt and financial obligations, mortgage balance, future education costs, years until retirement, standard of living, and additional considerations like personal goals, existing savings, and any other financial resources available to your dependents.
Income replacement is often estimated using the 10x rule, which multiplies annual income by 10. For Akshay, with an annual income of Rs 7.2 lakh, this would result in a coverage requirement of Rs 72 lakh. However, to account for higher inflation, rising education costs for his children, and healthcare costs for his parents, Akshay needs to consider a multiple of 15 times his annual expenses, resulting in a coverage of Rs 1.08 crore for future household expenses.
Term life insurance is a simple plan where you pay a yearly premium to an insurer for a specific number of years, and they promise to pay a sum assured to your family if you die during that tenure. Unlike other life insurance products, term life insurance does not come with a maturity benefit but provides higher coverage for lesser premium.
It's essential to remember that premiums vary based on age, health, gender, policy type, term length, and optional riders, influencing the affordability of your chosen coverage amount. As Akshay navigates his financial journey, ensuring he has enough money to provide for his family if he were to meet an untimely death is paramount. By carefully considering his needs and using comprehensive methods like the DIME (Debt, Income, Mortgage, Education) method, Akshay can make an informed decision about the right term life insurance coverage for his unique situation.
Akshay, in his financial planning, might also consider mutual funds and fixed deposits as supplementary investments, in addition to term life insurance. To secure his dependents' future beyond just insurance coverage, he could explore different investment avenues in personal-finance, such as diversifying his portfolio with mutual funds or creating a fixed deposit.
