Term insurance plan is affordable and offers not just tax benefits, but also peace of mind that your loved ones will continue to achieve their life goals even in case of your untimely demise. However, most of us might not have a clear idea of how much we should be insured for and for how long. As a result, we end up being underinsured or paying steeper premiums than we need to if we over-insure ourselves. There is, however, a simple way of figuring out how much insurance you ought to have, and what its term should be.
The basic formula to calculate the term insurance cover will depend on the age and annual income of person. You can go up to 25 times of your annual income to ensure you have an adequate cover.
Other Parameters to Consider
The above basic formula is an easy way to work out an estimate. However, one can arrive at a more accurate figure by taking into account the number of dependents you have, the living expenses of your dependents, the lifestyle you would wish them to have, the length of time you estimate that they will need the financial support in your absence, and existing investments you may have. If you have any saleable assets which can help your family in their hour of need, you can deduct these from the amount you have arrived at. Further, you should add the cost of the debts you currently have, such as a home loan or car loan. The resulting figure is a more accurate indicator of what amount you should be insured for.
Another factor worth considering is how long you should be insured for. Consistent investments into a specialized pension plan will provide for a good lifestyle once you retire. However, you need to be adequately insured until that age when you would be earning. This way, your family's goals will continue to be met even in your absence.
To summarize, the amount you should be insured for should be enough to cover your family's needs in your absence and for as long as they would need the financial support. With these parameters in place, you can have that peace of mind that your family will be able to go on to achieving their life goals even if you're not there to provide for them.