Term Insurance Coverage For Specific Period

Term Insurance (TI) is a type of life insurance cover that offers coverage only for a specific period. During an ongoing term, the beneficiaries receive a fixed sum as a death benefit if the policyholder passes away. This type of insurance is cost-effective and straightforward compared to other policies, such as Whole Life Insurance or Endowment policies. Since TI is for a defined period, making the right choice regarding the duration and the coverage becomes crucial. This article will highlight the importance of selecting the right term insurance coverage for a specific period and different methods of calculating.

Term Insurance (TI) is a type of life insurance cover that offers coverage...

How Does Term Insurance Work?

Term insurance works by policyholders paying regular premiums to maintain agreed-upon death benefit coverage for a defined policy tenure ranging from 5 to 40 years of customisation.

As long as premiums are not paid, total sum assured protection continues till term expiry. If the insured dies within the term, the nominee files a claim supported by all documents the insurer verifies before paying beneficiaries.

Nothing is payable if the policyholder survives until the term is completed, as only mortality protection is guaranteed. Those requiring more extended coverage must renew a new term policy if needed.

5 Key Factors to Consider While Selecting the Right Term Period

Choosing the appropriate term period is crucial to buying Term Life Insurance. This decision can significantly impact the amount of death benefit your family receives. While making a decision, you must consider the following factors.

Age

Your current age is vital in determining the suitable term period. Younger individuals may opt for longer-term policies as they have more working years ahead. On the other hand, older individuals might prefer a shorter term, aligning the policy with their remaining active years and decreasing financial responsibilities.

Financial goals

Your short-term and long-term financial goals are significant factors when selecting a term period. You must choose a lower premium plan if you have recurring financial commitments such as EMIs, children's education fees, or similar expenses.

Family circumstances

Every family is unique, and their financial needs vary. When deciding on the term period, you must evaluate your family's financial circumstances and future needs.

For example, if you have young children, you should opt for long-term insurance to ensure their financial security until they become independent. Alternatively, suppose your spouse is working and has a stable income. In that case, you may choose a short-term insurance policy, knowing that your family can be financially self-sufficient without your income.

Explore the ACKO Life Flexi Term plan and customise your coverage and policy tenure at any time based on your changing circumstances and lifestyle.

Retirement plans

Your anticipated retirement age can help determine the appropriate term period. Choosing a term that covers you until your retirement age, usually around 65 years, is advisable. Post-retirement, your financial responsibilities are expected to decrease, and your dependents may no longer require the same level of financial support. However, if you plan to work beyond the average retirement age or have significant post-retirement financial commitments, consider extending the term period.

Life stage

Your current life stage can also influence the choice of the term period. For example, if you are a young professional starting your career, you might have fewer financial responsibilities, and a longer-term may be suitable. With changing life stages, your financial obligations are bound to increase. You might get married and start a family. With an increasing number of dependents, your expenses will increase.

Calculating the Term Insurance coverage amount

Calculating the TI coverage amount you require can often be tricky. Don’t worry; the following points will help you out.

Assess your current income

A suitable term plan must be able to replace your income if you pass away. Insurance coverage of at least 10 to 15 times your annual income would ensure your family is financially secure.

Evaluate your family's financial needs

Consider your family's current and future financial requirements, such as monthly expenses, loans, children's education, marriages, and spouse's retirement. Such factors add to future costs and must be considered while finalising the coverage.

Subtract your existing assets

Your existing assets include savings, investments, and any fortune. You must subtract any existing assets while calculating suitable coverage. Your family can liquify these assets and use them in your absence.

Add liabilities

Include any outstanding loans or liabilities your family would need to repay in your absence.

Final calculation

Sum up the results of the above steps to arrive at the Term Insurance coverage amount you require. The amount should be enough to help uplift your family from financial problems in case of your untimely death.

Different Methods to Calculate Term Insurance Coverage

If you're still confused about calculating the Term Insurance coverage, here are a few textbook methods to calculate the coverage you need.

The Income Replacement method

It focuses on replacing your income upon your untimely demise. As we've seen earlier, it's advisable to have coverage of at least 10 to 15 times your current income. In such a situation, your income would be replaced, and your family would not be exposed to financial vulnerabilities. Check out: Income Replacement Calculator

Needs-based method

This method involves a more comprehensive approach to calculating the coverage amount. Start by listing all the financial needs that your family may encounter in case of your untimely death, such as follows.

Immediate expenses (funeral costs, medical bills, legal fees)
Debt repayment (any debt that you may not repay before passing away)
Ongoing living expenses (day-to-day needs, groceries, transportation)
Future needs (children's education, marriage, emergency fund)

Consider inflation as well to get a realistic estimate. Considering all the financial needs listed above, sum them up and subtract any existing assets your family could use.

Human Life Value (HLV) method

The Human Life Value is a popular method through which you can calculate the economic value of an individual. This method considers the individual's income, age, working years left, and expected future earnings. To calculate your HLV, follow these steps.

Roughly estimate your annual income and expected income growth rate.
Determine the number of working years left until your retirement.
Calculate the present value of your future earnings, considering the time value of money and inflation.
Subtract any outstanding debts, liabilities, and existing insurance coverage.

The total amount you get is your human life value. In order to replace the financial value you bring into the family, your coverage must be equivalent to your HLV.

DIME (Debt, Income, Mortgage, and Education) method

DIME is another popular method for calculating the suitable coverage for your term life insurance. As the name suggests, the method considers four fundamental financial needs: debt repayment, income replacement, mortgage protection, and education funding. To calculate the required coverage using the DIME method, follow these steps.

Calculate the total amount needed for debt repayment and immediate expenses.
Estimate the income replacement your family needs, considering the years they will require support.
Determine the amount required for mortgage protection and any other housing expenses.
Estimate the future education expenses for your children.

Add the amounts calculated for each category to determine the total term insurance coverage needed. When selecting a Term Insurance plan, it is essential to consider factors such as the insurance company's reputation, claim settlement ratio, policy features, premium rates, and riders. Research and compare different types of life insurance plans to find the one that best suits your needs and budget.

Frequently Asked Questions (FAQs)

Here’s a list of common questions and answers regarding selecting the right Term Insurance coverage for a specific period.

Can I extend my term insurance coverage after the policy term ends?

Yes, some TI policies allow you to extend your policy coverage beyond the initial term period, usually up to a specific age. This feature may be subject to additional premium payments and underwriting requirements. Review your policy documents thoroughly and consult your insurance provider for more details.

What happens if I do not die during my Term Insurance policy?

In most cases, if you do not die during your Term Insurance policy, the coverage will end, and you will not receive any benefits. However, some TI policies offer a Return of Premium (ROP) option, where you can receive the total premiums paid during the policy term if you outlive the policy. This feature usually comes with higher premium rates.

Can I change the amount of my term insurance coverage after purchasing the policy?

Some insurers offer policies with a feature called "policy modification" or "increase/decrease cover option," which allows you to adjust the sum assured after certain life events or milestones, such as marriage, the birth of a child, or taking on a mortgage.