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Ramalingam Kalirajan |8284 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jul 12, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by ASHWANI on Jun 25, 2024Hindi

how much cover with term insurance is good?

Ans: When determining the appropriate amount of term insurance coverage, consider several factors to ensure your family's financial security in your absence. Here’s a detailed approach to help you decide the right amount:

Understanding Term Insurance
Term insurance is a pure life insurance product that provides coverage for a specific period. If the insured person passes away during this term, the beneficiaries receive the death benefit. It's an essential part of financial planning, ensuring your family’s financial stability.

Factors to Consider
Income Replacement
Your term insurance should be enough to replace your income for a sufficient period. A general rule of thumb is to have coverage of 10 to 15 times your annual income. This ensures your family can maintain their lifestyle and meet daily expenses.

Liabilities and Debts
Consider your outstanding debts, such as home loans, car loans, or personal loans. Your insurance coverage should be enough to pay off these liabilities, preventing financial burdens on your family.

Financial Goals
Include future financial goals like your children's education, marriage, and other significant expenses. Ensure your coverage can fund these goals even in your absence.

Existing Savings and Investments
Take stock of your current savings and investments. The insurance coverage should complement these assets, ensuring comprehensive financial security.

Inflation
Factor in inflation, as the cost of living and expenses will rise over time. Ensure your coverage is adequate to meet future needs.

Calculating the Coverage
Human Life Value (HLV) Approach
The Human Life Value approach calculates the economic value of your life, considering your current and future income, expenses, and financial goals. This method provides a detailed estimate of the required coverage.

Expense Replacement Method
This method involves calculating your family’s annual expenses and multiplying by the number of years you want to provide for. It ensures your family’s daily needs are met.

Example Calculation
Let’s assume you are 44 years old, earning Rs 20 lakh annually. Here’s a breakdown of the calculation:

Income Replacement: 15 times annual income: 15 x Rs 20 lakh = Rs 3 crore.
Outstanding Loans: Home loan of Rs 50 lakh, personal loan of Rs 10 lakh = Rs 60 lakh.
Children’s Education and Marriage: Rs 50 lakh.
Total Required Coverage: Rs 3 crore + Rs 60 lakh + Rs 50 lakh = Rs 4.1 crore.
Choosing the Right Term Insurance Plan
Coverage Term
Select a coverage term that aligns with your retirement age or the age until your financial dependents are self-sufficient.

Premium Affordability
Choose a plan with premiums that fit your budget. Ensure you can maintain the policy without financial strain.

Additional Riders
Consider adding riders like critical illness, accidental death, or waiver of premium for enhanced protection.

Periodic Review
Regularly review your term insurance coverage. Life events like marriage, childbirth, or significant financial changes may require adjustments to your coverage.

Final Insights
Choosing the right amount of term insurance coverage is crucial for your family's financial security. By considering your income replacement needs, liabilities, financial goals, and inflation, you can determine an adequate coverage amount. Regular reviews ensure the coverage remains relevant to your changing financial circumstances.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner,

www.holisticinvestment.in

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.