Term insurance is supposed to be the ultimate financial support for your family in case of your untimely demise. Thus, the benefit amount of your term plan should match whatever you will contribute towards your family’s life.
Since this contribution is a direct result of your financial worth, the sum assured of your term plan should be equal to your financial worth. So, when we estimate our term insurance need using term insurance calculator it should give us a pretty good idea of our financial worth today, should it not?
Let’s find out…
The first thing you should account for is the monthly household expenses of the family. Term insurance should either offer the family a monthly income or enough money to generate a monthly income equal to their monthly household budget.
For example: if your current monthly household expense is Rs. 50,000 (or Rs. 600,000 a year). You’d need to add about Rs. 1 crore (max.) to your term insurance death benefit.
Now in Canara HSBC Life’s iSelect Smart360 Term Plan you can choose whether this is paid in a lump sum or as a monthly income or even both. This will help your dependents continue their lives without stressing about the income.
In our example we have already included the money for the post-retirement expenses of spouse in the monthly household expense. That is because we considered the household to run forever. However, in reality, the major part will probably stop within 20-30 years.
Thus, over time the reduced household budget would equalize the remaining corpus and work as a buffer for retirement.
Estimating the goals’ cost would be rather simple, as you can simply take the current costs of the goals.
For example, higher education in top domestic institutions may cost somewhere from Rs. 10 lakhs to 15 lakhs. Add to this a similar amount for marriage and you have about Rs. 25 – 30 Lakh more. If you have two children, simply double it to Rs. 50-60 lakh.
To properly estimate your term insurance need at this moment, financial planners use a method similar to the one given below:
While you can understand and agree with most of the assets and costs the following are more than they look at the surface:
Now, taking our example one step further, let’s assume the sum total of your current assets which can be easily converted to cash comes out to be Rs. 15 Lakhs.
Thus, your total life insurance need would be somewhere about…Rs. 1.5 crore (incl. 1cr. Household + 60 Lakh for Children – 15 Lakh Assets)
This is your approximate contribution to your family’s lives for all the years you stay with them. In a way, this is your approximate financial worth for your family.
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The term insurance calculators work on approximation basis. The general thumb-rule in the insurance industry is,
‘10 to 20 times of annual take-home income is sufficient to look after the dependent’s expenses’
Therefore, most term insurance calculators simply ask for your current age and annual income. As in our example, the annual income of our hero could be anywhere between Rs. 12 – 15 Lakh. (That is assuming 50% of his/her monthly income goes towards household expenses)
Thus, as per an online term insurance calculator, this person’s financial worth at the moment ranges anywhere between Rs. 1.2 crore to 1.5 crores.
Now, this estimate is pretty close to the one we estimated using the detailed ‘need analysis’. So, we can say that ‘the online term insurance calculator provides a pretty good approximation of your financial worth today,’ if not the most accurate.
Choosing the Best Term Insurance Plan
Once you have calculated your financial worth, you can go ahead and look at the other features and benefits to figure out the best term insurance for your family. Few of these features we have discussed earlier, for example, regular income pay out after claim. Others that you can look for are:
So don’t compromise on your family’s financial safety. Use the term insurance calculator and estimate your financial worth to buy the adequate life cover your family will need.
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