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How much term cover do you need?

  3/24/16 4:33 AM

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Demystifying term insurance

If you are an earning professional desperately trying to demystify Term insurance in terms of exactly how much cover you need, this article is a must-read for you. Here, we will try to demystify Term insurance using different scenarios that, I’m sure you’d find on a daily basis somewhere around you.

Term insurance is pure insurance, in the sense that you pay premiums in exchange for the promise from the insurer that they will pay a fixed amount to your nominees in the event of your demise, anytime during the policy term. The biggest question however, that most people face is to decide the amount of term insurance cover that they should settle for. Here are some scenarios for your understanding:

Jai is a 30 year old IT professional who’s got married 4 years back. His wife is expecting their first child and has just quit working. She plans to remain a housewife till at least 2 years after she delivers. How much Term insurance does Jai need?

The income rule says that one should have term insurance equal to 8 or 10 times the annual income. So, Jai would need 80 lakhs to a crore of term insurance.

Ajay is a 35 year old civil engineer who has been working since the last 15 years. He is married to Jaya, who’s also working in the HR division of a fmcg company. They have twin boys, who are studying in the 3rd grade. Ajay’s 65 year old widowed mother lives with them and is dependent on her son for financial support. How much Term insurance does Ajay need?

Here, the income rule alone may not suffice to decide on the amount of cover needed. Jaya’s income also needs to be clubbed to find out the household income. Also, the educational expenses of the children have to be taken into consideration as well as the dependent mother’s potential medical expenses.

Vedika is a 40 year old widow with a son who studies in the 10 standard. She works in a pharmaceutical company. They live in their own house which has a home loan for which she pays EMI’s of Rs.7500/- a month. She draws an annual salary of 8 lakhs. How much Term insurance does Vedika need?

Here, the EMI’s have to be also factored into the calculations. The loan amount has to be added with the potential cost of education of the child along with the living cost to the amount computed using the income rule. So, for instance the loan amount is 1 crore and the potential cost of future education is 25 lakhs and the living expenses for 10 years is 35 lakhs, the term insurance required would be equal to 1.60 crores.

Francis works in the hospitality industry drawing 5 lakhs p.a. He is 25 years old and lives with his parents. His father has retired from his government service and is drawing a pension of Rs.10000/- p.m. He is set to be married in the next 6-8 months. He owns a car for which he has taken a car loan of 4 lakhs. How much Term insurance does Francis need?

Since Francis is in his initial stage, he does not have a lot of responsibilities and hence he may not require a high term cover. He would do good to take a minimal cover which would help him to pay off his car loans, in the event of his demise at a young age. However, his needs will change once he gets married and starts a family and hence he’ll have to go for a higher cover for a higher term, in the near future.

Term plans are not investments

The idea here is that Term plans are not investments and hence should be only considered as a means of securing your dependants against the financial burden of life, in the event of your unfortunate demise. Hence, don’t expect any returns from it and treat it as your dear ones would treat the memories that you’d leave behind; Priceless.

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