Taking life insurance has become a more critical part of financial planning. Term insurance is the most affordable option. It provides comprehensive life coverage for a specified duration. In case of the policyholder's unfortunate death within the policy duration, beneficiaries will get the coverage amount, known as the death benefit.

If you’re considering purchasing a term plan, you must determine the correct coverage amount to ensure that your family is adequately protected in your absence. Read on to learn everything you need to know about determining the right coverage.

Tips to Determine the Right Term Plan Coverage Amount

Calculating the right coverage amount is necessary to ensure your family can meet all the expenses in your absence. You can also hire a financial advisor to determine your coverage value and premiums or use an online term life insurance calculator to determine the same.

Being the sole or primary earner in the family, you must be more concerned about the future financial security of your lovable. You can follow the steps defined here to calculate the right coverage amount for your term insurance policy.

• Determine your current financial situation: This step includes your current annual income, all monthly and annual expenses, including insurance premiums, educational costs, etc., and your outstanding debts, such as loans.
• Determine future financial requirements: The next step in calculating the right coverage amount for your term insurance policy is to examine all your future financial needs, including your children's educational costs, future events like children's marriage, and expenses related to the family's ongoing lifestyle.
• Determine income replacement value: It is mainly calculated by multiplying your annual income by the number of years remaining for your youngest child to become independent. For example, if your annual income is 12 lakhs, your youngest child is 10, and you need 15 years to become financially stable, then the value becomes 1.80 cr.
• Consider inflation: When estimating future expenses, you will calculate them according to the current rates. However, you must also include the inflation rates to calculate the right coverage amount for your term insurance plans.
• Your assets and insurance policies: All your existing assets, insurance coverages, savings, and investments from which your family could benefit in your absence should be deducted from the coverage amount.

You need to carefully consider all these factors stepwise to calculate a significant coverage amount for your family’s future financial needs in your absence.

A practical approach to calculate the coverage amount for your term insurance policy

You will be easily able to understand how you can practically calculate the actual coverage amount you will need from your term insurance policy.  Here is a simplified approach that you can use to calculate the value:

Coverage Amount= (Annual Income * Years of Income Replacement) + Debts and Liabilities + Future Goals - Existing Assets

Let's make it more understandable through an example:

• Annual income: ?25 lakhs
• Years of income replacement: 20 years
• Income replacement value: ?25 lakhs * 20 = ?5 cr
• Total debts and liabilities: ?60 lakhs
• Future goals with inflation: ?20 lakhs
• Total existing assets: ?50 lakhs
• Total coverage amount: ( 5 crores + 60 lakhs + 20 lakhs) - 50 lakhs = ?5.30 crores

This is how you can calculate the appropriate coverage amount for your chosen term insurance plan.

Conclusion

To calculate the right coverage amount for your term insurance plan, you must carefully determine your financial obligations, existing assets and future requirements. Follow these simplified steps to calculate significant coverage value.

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