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Should I use life cover calculators to decide my term insurance life cover?

10 Oct 22      |       | ShareShare Share Blog Or copy link Copy Share this link via

Authored by: Anurag Ainapurapu
Reviewed by: Krupa Kenia

The Long Read


Everything you *need to know* is right above this. Scroll down, only if you'd still like to read more (honestly, why?)

No, you should not.  

 

You will frequently come across many detailed calculators especially on the internet that take into account your income, expenses, liabilities and other factors to determine your life cover amount. 

 

But please understand that they function more on standard assumptions than on actual facts. 

 

So their recommendation is not super accurate. 

 

Hence, instead of following complex calculators, all you need is a broad calculation based on your income and policy duration.

A term policy payout tries to replace your income when you pass away. While you are alive, your income may be used by your loved ones to support themselves and cover their expenses. If you are no longer alive, you won’t earn any income and your loved ones will be impacted because they don’t have your income to support themselves. 

 

A term policy payout value will typically be the sum of your income for all the years you would have worked had you been alive. This payout can be used by your loved ones to sustain themselves and overcome any financial difficulties that may come due to your passing. 

 

Let’s take a small example to understand this concept better. 

 

Suppose, you are 30 years old and plan to work till 60 (i.e. a span of 30 years). You earn ₹ 7 lakhs every year. In a span of 30 years, you would have earned ₹ 2.1 crore, this ₹ 2.1 crore will be your life cover. 

 

Now, even if you pass away during the 15th year of your planned 30 year career, your family will still get ₹ 2.1 crore if you had bought a term insurance policy that covered you till your retirement age. Now, if you did not have any term insurance, you would have probably earned only ₹ 1.05 crore till your 15th year and your family would have lost your future income (i.e. the income you would have earned in the next 15 years).

Do you want to cover your family only for 10-15 years after your passing? No, right? 
 

Then you should never follow this rule of thumb. You have no way of knowing if this amount will even be adequate for your family. 
 

For example, imagine that you are a 30 year old having ₹ 10 lakhs annual income and you want to work till the age of 50. Assume you earn ₹ 10 lakhs for the next 20 years, you would have earned ₹ 2 crore. Now if you use the 10x rule, you would only opt for a ₹ 1 crore cover, which may only sustain your dependents for 10 years after your passing away. 


Find out what life cover you should get by taking the KlarifyLife Term Guide.

Calculating your life cover is not tough. Just follow this simple formula: 

Life cover = Policy duration (in years) x Your Total Current Annual income*

 

*It is the pre-tax annual income that you earn by actively working, aka the income that’ll stop coming in if you’re not around. It includes your salary and business income but not any rental income, interest, and dividend. 


To learn more about determining your life cover, visit the Term Guide and complete the journey.

When you’re buying a term plan, always remember this:
 

Your life cover is just the replacement of your income you’d have earned if you were still alive. In your absence, the payout from your term insurance will support your family financially.

 

Say your current annual income is ₹ 20 lakhs.

 

This is the amount you need to meet your household expenses, take care of financial needs like child’s education, loan repayment, elderly care, medical expenses and so on, while maintaining a certain standard of living and also investing and saving for future goals

 

You’re 30 years old now and you wish to stay covered till your retirement age of say 65 years. 

 

Then your life cover will be ₹ 20 lakhs x 35 = ₹ 7 crore - a significantly high amount. 

Now imagine, if you need ₹ 20 lakhs to take care of your family now, they will need at least this amount for their bare minimum upkeep if you’re no more. 

 

And chances are you won’t pass away right after you buy a term plan. If you pass away, say 10-15 years after buying the plan, the value of the life cover your family will receive will have reduced over time, thanks to inflation. 

 

If you have a high income, your life cover will need to be relatively higher to avoid being underinsured. So even if the life cover amount feels high right now, know that it is what your loved ones will require to avert any financial crisis in the event of your unexpected death.

Yes you do. It’s very simple. If you pass away unexpectedly, your family will not only suffer emotionally, but may also face a financial crisis. Let’s understand how:

 

  • Say both you and your spouse are earning. Then your total household income will reduce if one of you is no more 
     

  • Your spouse may also need to dedicate more time at home, resulting in a pay cut.

    Say you are a homemaker or a stay-at-home parent, and not an earning member. If you pass away, your family may need to hire professional help to take care of the children and/or the elderly. Even if as a homemaker, your life cover is less than that of your spouse’s, that’s still money which will come in handy in your absence. 

 

Additionally, if there is a change of heart between you and your spouse (such as divorce or separation), you may no longer get benefits from your spouse’s policy if they change their nominee. 

 

The above reasons show why both you and your spouse need to buy term insurance.

 

And don’t worry about your life cover being as high as that of your spouse’s. It will depend only on your current annual income and policy duration and not on your spouse’s cover. That’s because your life cover will be replacing your income in your absence. Got it?

Here’s a simple formula you can use to check if your term insurance life cover is adequate. 

 

The additional life cover you need = Current annual income x Number of years you plan to work from now - Current cover

 

 

If this value is a positive number, then you are underinsured. 

If it’s a negative number, you are overinsured. 

 

Let’s take an example. 

 

Say, you bought a term plan with ₹ 1 crore cover for a policy term of 30 years at the age of 30, i.e. it covers you till 60 years. 

 

At the age of 35, your current annual income is ₹ 12 lakhs. 

Number of years you plan to work from now is of course 25 years.

 

The additional life cover you need = ₹ 12 lakhs * 25 - ₹ 1 crore = ₹ 2 crores

In this example, the policyholder is underinsured by ₹ 2 crores.



As a practice, remember this. You are at a high risk of being underinsured if 

 

  • You’ve not reviewed your cover for ages to ensure it meets your changing needs

  • You’ve relied only on group term plan which is insufficient and has many limitations

  • You’ve decided the premium you want to pay and settled for the lower life cover you got against it

Yes you can increase your life cover in the following ways: 
 

  • If you have a term plan with a life-stage increment option, you can increase the cover at certain predefined life stages such as marriage, birth of 1st child, 2nd child etc. In this case, you have to inform your insurer about when you want to increase the cover. Not all term plans have this option, so check with your insurer about this before you buy a plan or speak to your insurance advisor. 
     

  • If you have a term plan with increasing cover, your life cover will keep growing every year until it reaches a maximum limit (typically set by the insurer). The best part about this plan is that you don’t need to buy a new policy or inform the insurer about increasing the cover.
     

  • You can even buy a separate term policy to increase your life cover. For example, if your current life cover is ₹ 50 lakhs but you need a total life cover of ₹ 1 crore, you can buy another term policy with ₹ 50 lakhs cover.

Yes you can but only if you have a term plan with decreasing life cover. In such plans, your life cover is reduced by a fixed, pre-decided percentage every year until the policy duration ends.

 

As you age, your dependence on your term life plan may reduce if:

  • You’ve create the required wealth to support your family in the future 

  • You’ve taken care of a significant portion of your debts

  • Your spouse can also financially support your loved ones in an adequate way 

  • Your financial dependents became independent earlier than you thought
     

If you think any of these reasons may be in your future, you can opt for term plans with decreasing cover.

 

If you feel that your liabilities may increase in the future or your financial dependents need more time to become independent, then you  can consider buying a term plan with increasing life cover. 

 

In this term plan, your life cover increases every year by a fixed percentage till the time it reaches a maximum value (typically specified by your insurer). 

If you feel that in the future your liabilities will decrease or your financial dependents will become independent earlier, you can consider buying a term plan with decreasing life cover.

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