How much term life insurance do I need?

Term life insurance is the simplest, most effective way to secure your family's future. It ensures your family can take care of themselves in case anything happens to you. However, to ensure this happens properly, you need to have the right cover.

In this video, we tell you how you should go about figuring out the term life cover you should go for. You will get to know the step-by-step approach you should take to reach that number. Watch now!

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Lets look at the five steps Akshay needs to take to calculate his term insurance coverage

Step 1 – factor in your dependent’s monthly expenses

Akshay’s family monthly expenses are 60,000 rupees which comes to 7.2 lacs per year.

It is generally recommended to provide coverage at 10-15 times of the annual expenses

While this is entirely Akshay’s call, in his case, a multiple of 15 is suggested to account for higher inflation on account of rising education costs for his children & the healthcare costs for his parents.

At a multiple of 15 times, Akshay’s coverage on the basis of future household expenses needs to come about to 1.08 crores

Step 2 – factor in the liabilities

The most difficult situation one can leave their family in is with a pile of debt.

Akshay has an outstanding of 70 lakh rupees on his home loan which is his primary burden that needs to get taken care of

Adding the 70 lacs to the 1.08 crores takes Akshay’s life insurance coverage requirements to 1.78 crores

Step 3 – Akshay needs to factor in important life events and goals

Akshay has two young children who have a number of milestones coming up with their education and their marriage. Akshay wants the best for his children and has already setup a monthly SIP of 7,000 rupees to create a corpus of 20 lacs over the next 15 years to manage their higher studies. His untimely death will put his goals in a limbo and hence it is wise to add this amount to Akshay’s life insurance coverage requirements.

This takes up Akshay’s life insurance requirement to 1.98 crores now.

Step 4 – Factor in a retirement corpus for your spouse

So far, Akshay has been calculating his life insurance needs on the basis of existential and unavoidable daily expenses, existing liabilities and future visible needs like his children’s education.

The last variable to consider here for Akshay is to leave a corpus for his wife which can grow over time so that she can manage her retirement. Akshay reckons his wife will need at least 80 lacs in her retirement kitty.

This additional 80 lacs pushes up Akshay’s calculation of his ideal life insurance coverage to 2.78 crores

A useful tip here. As you would have noticed, to calculate how much term insurance you need is a science but is certainly not an exact science because you are predicting into the future and making a few assumptions.

Hence, it is never a bad idea for you to be conservative in your estimates so if you think your family can do with 50,000 rupees in monthly expenses, I suggest you nevertheless estimate 60,000 rupees.

Step 5 – factor in additional variables like your age and your wealth

Your age and your current wealth are also important determinants when calculating your term insurance requirement.

Let’s start with age.

Akshay’s term insurance requirement was very high because he has debts, high monthly expenses and 4 dependents including young children who have their entire future ahead of them.

But if you are in your 20s and not married .. then your life insurance requirement is not that high.

Similarly, if you are in your 50s with a decent investment portfolio, your children are married & working – then to your life insurance requirement is not going to be too high. Hence, don’t forget to factor in your age.

Another key factor is your existing wealth We spoke about factoring liabilities like home loans, credit cards and other money you owe to others while calculating life insurance coverage.

On the other side of your personal balance sheet are the investments that you have made over the years which can be accessed by your family on account of your demise. These include your provident fund, fixed deposits, mutual funds and even your real estate.

Let’s assume Akshay has a mutual fund portfolio of 30 lakhs. This money is readily accessible to the family upon his demise which means he can deduct this amount from his life insurance coverage requirements. So from 2.78 crores, his new life cover requirement is 2.48 crores now.

The term insurance requirements exercise we just went through is not an exact science but should have helped you understand your future priorities and current standings with respect to offering financial stability to your family.

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