Winning Bizness Desk

Mumbai. Term insurance is a type of life insurance policy that gives you coverage for a specified period. If the life insured dies during the term of the policy, the cover amount is paid to the nominee. It gives financial security to the family in case of death of the insured. Term insurance gives financial protection to your family in case of your absence. If you want that your family does not have to face financial problems in your absence, then you can take term insurance.

However, it is generally seen that before taking insurance, usually the biggest question in the mind of people is how much term insurance cover should be taken. Experts have given many formulas for this. With their help, you will be able to estimate the amount of insurance.

Human life value concept

The Human Life Value (HLV) concept calculates the total income that a person can earn during his working life. It is then discounted with the estimated inflation rate. In other words, the future income of that person is calculated according to today's price. This value is taken out from the expenditure on the individual to find out the economic value of that person in the family.

Understand this with an instance

For example, suppose if Ramesh is a 40 year old person who earns Rs 5 lakh annually. Out of this, he spends 1 lakh 30 thousand rupees on his personal expenses. The remaining Rs 3 lakh 70 is spent on the family. Here 3 lakh 70 thousand will be the economic value of Ramesh. That is, even if he is not there, his family will need 3 lakh 70 thousand rupees annually. You should choose a term insurance cover according to this need.

income replacement value concept

This is a basic way to calculate your life insurance coverage needs and is based on your annual income. Accordingly, the required insurance coverage is the multiplier of your annual income plus the remaining years of retirement. i.e. required insurance coverage = annual income x number of years for retirement. For example, suppose your annual income is Rs 4 lakh and you are 30 years old and are planning to retire after 30 years i.e. at the age of 60 years. In this case, your required life insurance coverage should be Rs 1.2 crores (4,00,000 x 30).

Underwriters thumb rule

Under this, the sum insured should be in multiples of annual income based on age. For example, individuals in the age group of 20 to 30 years should have life insurance coverage of 25 times their annual income. Whereas, those above 40-50 years of age should have life insurance coverage of 20 times their annual income.

If you have taken a loan..

If you have a loan or debt, then this should also be kept in mind. In such a situation, if you have taken a home loan of 50 lakhs, then this should also be included in the term insurance cover. If you have other loans or debts, then the insurance cover should be decided keeping them in mind.