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.
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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.
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.
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.
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.
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.
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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.
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 TI coverage amount you require can often be tricky. Don’t worry; the following points will help you out.
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.
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.
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.
Include any outstanding loans or liabilities your family would need to repay in your absence.
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.
If you're still confused about calculating the Term Insurance coverage, here are a few textbook methods to calculate the coverage you need.
A financial assessment of your family's needs, present liabilities, and long-term goals is important before finalising a term insurance plan. Although there are various means of determining the best coverage that suits your requirements, a term insurance calculator can simplify the process. This calculator will enable you to easily compare life insurance options, such as a 1 crore term insurance policy, helping you choose the coverage that best fits your needs.
Many people opt for term insurance because it is simple, easy to understand, and provides comprehensive protection at an affordable price. In case of your untimely death, a term plan ensures that your dependents receive a lump sum payment, providing them financial stability during challenging times.
Selecting the right term insurance coverage for a specific period is a critical decision that demands careful consideration of various factors such as age, family circumstances, financial goals, retirement plans, and current life stage. By understanding your needs, you can calculate the right coverage amount using the Human Life Value (HLV) or the DIME method.
Here’s a list of common questions and answers regarding selecting the right Term Insurance coverage for a specific period.
Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.
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Reviewed by Vaibhav Kumar Kaushik 
Acko Technology & Services Private Limited
#36/5, Hustlehub One East, Somasandrapalya, 27th Main Rd, Sector 2, HSR Layout, Bengaluru, Karnataka 560102
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