PremiumNEW DELHI: Term insurance is the simplest form of life insurance that pays out the sum assured if the insured dies during the term of the policy. The rules applicable to term insurances may be simple, but calculating the policy cover that one may need, can be tricky, as having inadequate protection could be devastating for your dependent family members.
You might come across various simple thumb rules for calculating adequate sum assured, however, financial planners and industry experts do not suggest such rules.
Premium Premium 
Premium Premium Among the top methods to calculate required policy cover are human life value, income replacement method, expense replacement method and underwriter's thumb rule. We look at each of these methods in detail.
Human life value
An insurance cover should be proportionate to an individual's economic value, or also called human life value to the family. The concept primarily considers the value of future income, expenses, liabilities and investments.
Under the HLV method, you need to consider your income, expenses, expected future responsibilities, and goals to determine the insurance need.
Income replacement value
It is assumed that the goal of life insurance is to replace the lost earnings of the breadwinner in case of his or her death. One of the simplest ways to calculate your income replacement value is: insurance cover = current annual income multiplied by years left for retirement.
Expense replacement method
In this method, individuals first need to calculate their day-to-day household expenses and goals, such as loans, children’s education and their marriage, as well as providing for financially dependent parents. The above figure is the total money that your family needs today.
The next step is to deduct your present invested assets and the life insurance cover that you may already have. However, do remember to exclude assets such as home and car in this calculation, as your family members are most likely to continue using them and may not liquidate these assets in the event of your death.
The resultant figure that you will get by deducting invested assets and insurance cover from expenses and goals will give you an idea as to how much cover you need.
Underwriter's thumb rule
For calculating the minimum sum assured in term life insurance, the easiest way is 10 times the annual income, which means if your current annual income is ₹10 lakh, you should have a life insurance cover worth at least ₹1 crore.
However, according to investment advisers, this method is a flawed way of calculating a policy cover.
Premium is one of the biggest factors when choosing a life insurance plan. According to experts, individuals should not go by any thumb rules when it comes to premiums, as they are dependent upon the sum assured. However, a customer can get the best prices online along with comparing the premiums and plans as per their requirements.
Click here to read the Mint ePaperMint is now on Telegram. Join Mint channel in your Telegram and stay updated with the latest business news.
