Term insurance is meant for one primary task – providing optimal financial security to your family when you are not around. The policy, thus, becomes a necessary part of your portfolio and helps you plan against unforeseen emergencies.

India is waking up to the importance of having a life insurance policy, more so after the pandemic. In FY 2021, the penetration of life insurance increased to 4.2% compared to 3.2% in FY 2020.

However, when it comes to choosing the right term insurance coverage, a gap is found, more often than not. According to Llyod’s Underinsurance Report 2018, India ranked in the second position in the list of most underinsured countries in the world. There was observed to be a gap of USD 27 billion or INR 1.98 lakh crores.

According to other data published by the Government and the insurance industry, 75% of Indians were not insured under any life insurance plan. Even those insured were grossly underinsured having insured themselves for only 8% of what would be needed in their absence.

A lack of awareness might be the primary reason why underinsurance is rampant in India. While people invest in a term insurance plan, they fail to opt for the right coverage amount simply because they might not know what it should be. Do you know how much term insurance coverage should you take?

If you don’t, there are various ways in which you can find that out. Here are some such ways which help you calculate the term insurance coverage requirement. Have a look –

1. The basic income rules

This is more like a ready reckoner that states the minimum coverage that you should have in a term insurance policy. The income rule states that the sum assured of your term life insurance policy should be at least 10 to 12 times your annual income.

So, for instance, say you have an annual income of INR 15 lakhs. In this case, your term life cover should be between INR 1.5 crores and INR 1.8 crores.

The income rule is the most basic of rules which you can use to assess if your term insurance coverage is enough or not.

2. Human Life Value (HLV) method

The Human Life Value (HLV) method takes a different approach to calculating your term cover requirement. Under this method, the income that you contribute to your family every year is taken into consideration. Then the sum assured is determined in such a way that the corpus, when invested, would yield the desired annual income to your family in your absence.

Let’s simplify with an example.

Current age30 years
Retirement age60 years
Net take home salary every monthRs.55,000
Expected rise in income10% every year
Expected returns on investments11% per annum
Discounting rate of interest0.91%
Human Life ValueRs. 1,74, 18, 368


So if you have a sum assured of INR 1.74 crores, the same would be paid to your family on your premature demise. This would replace the income that your family lost in the case of your premature demise.

Thus, the HLV method looks to replace your family’s lost income in your absence.

3. Underwriter’s rule of the thumb

This is another calculation which uses a variation of the income rule to determine the right amount of sum assured. Under this method, the sum assured is calculated as a multiple of the annual income. However, the multiple depends on your age. It is as follows –

Age bracketMultiple of annual income
20 to 30 years15 times
31 to 40 years14 times
41 to 45 years12 times
46 to 50 years10 times
51 to 55 years8 times
56 years and above6 times

So, if you are 35 years old and have an annual income of INR 15 lakhs, the optimal sum assured would be 14 times the income, i.e., INR 2.1 crores.

4. Financial need analysis

This is a more detailed method to determine the ideal coverage you should opt for. Under this method, the following factors are considered –

  • Your income
  • Expenses
  • Existing assets
  • Existing liabilities
  • Financial goals
  • Inflation

All these factors are used to calculate the sum assured that would be needed. There are online calculators that assess these factors and point out the ideal sum assured for your needs.

You can use one or more of these methods to calculate the term insurance coverage requirement. Remember, an optimal sum assured is essential so that your family enjoys the same lifestyle that you provide them with. Moreover, your financial goals should also be fulfilled whether or not you are around.

So, don’t be in a hurry. Calculate the optimal coverage first and then choose the right plan. You can always contact the experts at Tata Capital Wealth for assistance or click on the link below to calculate your Human Life Value (HLV).

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