Explained: Why your ideal term cover should be 10-15 times your annual pay

A term insurance policy is one of the simplest and most affordable forms of life insurance that covers the family of the policyholder in the event of his/her unfortunate demise. All that the policyholder needs to do is pay a fixed premium, and if he/she dies during the policy term, his/her nominee(s) receive a fixed amount of money that they can use to continue living their lives keeping financial distress at bay. 

Buy a cover as soon as you start earning 

By the time you reach your mid-30s, you may be married with children and have a stable income, whether salaried or self-employed. Additionally, you may have retired parents who depend on you financially. It is essential to have sufficient coverage to pay for them all. 

 

"Everyone with an earning should buy a term insurance if they have any family members partially or fully depending on their income. For example, if your parents depend on your income, you should buy a term plan as soon as you start earning. If the parents have their independent income, your spouse may be dependent after marriage. In this case, you may buy term insurance after marriage. Insufficient cover defeats the purpose of taking term insurance," said Ajinkya Kulkarni of Wint Wealth.

" In your thirties, it is recommended to have coverage of up to 10-15 times of your annual income. So, if your annual income is Rs 10 lskh, a cover of Rs 1 crore is required to protect your family from all possible expenses until your retirement age or earning capacity," said Rhishabh Garg, Head - Term Insurance, Policybazaar.com

Calculate post-tax income 

The first step to finding the optimal term insurance cover is calculating the post-tax income you contribute to the household after your expenses. Use this number to calculate your total financial contribution to your family up to your retirement age, factoring in inflation, income appreciation, and various financial goals and needs (for example, child education, retirement planning, EMIs, etc.). After that, calculate the present value of the total sum contributed over your earning lifespan. 

"You should get a term cover that replaces the financial contribution to your family in the unfortunate situation of loss of life. The ideal duration for a term plan is up to the age you plan to earn through work. So, a term cover until 60 is optimal (even though some term plans are also available up to 80 years of age).  Once you have calculated the term insurance cover and the plan duration, compare the premiums of top insurers (without any riders, etc.) on top aggregator websites or individual sites and choose the one with the lowest premium. Do not go for any riders etc," said Kulkarni. 

What is the ideal cover?

When planning to purchase term insurance, it's important to consider various factors such as one-time expenses like child education and marriage, any outstanding loans such as home, car, or personal loans, retirement planning for your spouse, medical emergencies, and daily expenses. Understanding all your liabilities is crucial for effective planning. 

As a thumb rule, having a term cover which is 10-15 times of your annual income is an ideal cover.

Policybazaar addresses this using an example - Mr. Sharma has an annual income of Rs 10 lakh and a monthly expense of Rs 25,000 (i.e. INR 3 lacs annually). Additionally, he has an outstanding loan of Rs 30 lakh. Basis inflation of 8%, his expenses over the next 20 years would be Rs 1.2 crore, and an additional loan of Rs 30 lakh to cover. Hence, an ideal cover would be Rs 1.5 crore i.e. 15x of annual income.

"As your liabilities increase, your cover should increase too. You must make a rounded estimation of your financial realities – income, debt, savings, lifestyle, etc. – to derive your life cover. As you progress through various life stages, your financial requirements change. For instance, the financial needs of a 25-year-old single female are different from those of a 40-year-old mother of two. Ideally, you must review your financial portfolio annually. But, to minimize the tediousness, I will advise that you compulsorily review your protection requirements at least after every life milestone like marriage, new home, birth of your baby, etc," said Anup Seth, Chief Distribution Officer Edelweiss Tokio Life insurance.

For instance, if you want to create a corpus for your child and build a contingency fund in addition to securing your loved ones, buying a single-term insurance plan will not help address all these goals. Simply put, you left at least 2 financial goals unaddressed.  

What is the best age to get a term plan?

"The need for term insurance coverage is typically greatest when you are in the middle of your career and have liabilities to pay. It is therefore advised to pay a term insurance plan as early as possible so that you can lock in the highest coverage possible at minimum prices. Delaying the purchase of term insurance can sometimes prove to be wrong also the chances are quite high that the premium may be exceptionally high. To avoid such circumstances, it is advised to buy a term plan at an early age," said Garg.

Different types of term plans 

Regular term plans offer a death benefit to the nominee of the policy in case of the policyholder’s death during the policy term, this benefit could be either a lump sum or a recurring amount. Since it is a pure-risk plan, the policyholder is not eligible for any kind of maturity benefit if they outlive the policy term. These plans are highly affordable and provide high coverage against life’s uncertainties. 
 

Term Return of Premium (TROP) plans: As the name indicates, this plan returns the premium paid if the policyholder survives the policy term. In case of a policyholder’s unfortunate death, their nominee will receive the designated sum assured. However, in the term insurance category, these are not as affordable as others are. They come at about 1.8x to 2x the cost of regular term plans.
 

Return of Premium at no cost: under this plan, the policyholder has the option to exit the policy during a specific period in the policy term and get all their paid premiums back minus GSTOn the other hand, if the policyholder passes away prematurely, the nominee will receive the death benefit payout. This makes it a financially wise plan with excellent coverage and affordability, suitable for all kinds of buyers.
 

Independent term homemaker plan: Assigning a specific amount of life insurance is equally important for women to ensure the emotional and financial well-being of their families in case of their untimely demise. For homemakers, a life insurance plan provides a guaranteed sum to support the basic future expenses of their family after their death. The sum assured for these plans can range between Rs 50 lakh to Rs 1 crore which adequately covers their dependents in case of their demise. For example, if a husband has a term cover of Rs. 1 crore and the wife has a cover of Rs. 50 lakhs, then the total sum of Rs. 1.5 crores will help secure their child's future.

"Term insurance and critical illness solutions are among key protection products that offer you financial immunity from events like loss of life or diagnosis of serious ailments. There are also wealth accumulation products like endowment or market-linked policies which help people not only save their money but also grow their wealth for longer-term goals like a child’s education. Income solutions offer a foolproof method of creating an alternate or second source of income for people across age groups. Similarly, pension and annuity products are an ideal method for retirement planning," said Seth.

How to choose the right plan?

Some popular plans in the market currently are  HDFC Life, ICICI Prudential, Max Life TATA AIA Life and Aditya Birla Life Insurance and PNB MetLife. All these plans have a nearly 100 per cent claims settlement ratio.  
 

"Besides comparing the cost of multiple term plans of different companies, it is critical to check the insurance company's claim settlement ratio. It serves as a measure of how many of the 100 claims it receives are settled. Since a higher settlement ratio is viewed favourably, insurance companies with a strong claim settlement ratio are seen as a better choice," explained Adhil Shetty, CEO of Bankbazaar.