"It completely depends on your requirements," said Renu Maheswari, certified financial planner and Sebi registered investment adviser, CEO and principal advisor, Finscholarz Wealth Managers
"Sum assured of term insurance policy should be the amount that when invested in a conservative portfolio can take care of all the future goals and expenses of the dependent family," she adds.
So if that is the case, then how should one decide how much term policy to buy? Maheswari explained, it should be the present value of all future expenses and goals reduced by accumulated wealth.
Now, let’s understand this with a more simple example.
Say your unavoidable expenses per month is ₹40,000, i.e. ₹4.8 lakh yearly. Experts recommend, one should have coverage which is at least 10-15 times their annual expense. So, in this case, it should be at least ₹48 lakh.
Next, let’s assume you have a housing loan and car loan, and the outstanding amount for the two is ₹55 lakh.
In case, you meet with an untimely death, you want to make sure that your family does not have to go through any financial hardship. Hence, to secure your family’s financial future, you want your children to have a kitty of ₹20 lakh for their future education and a retirement corpus of ₹80 lakh for your spouse. Adding all of it, the total amount comes around ₹2 crore.
Now, you have savings and investments of ₹20 lakh that can be readily accessed upon your untimely death. So, if you deduct that amount from ₹2 crore that your family would need upon your untimely demise, it would be around ₹1.8 crore. Under such circumstances, you should opt for a term insurance cover of ₹1.8 crore.
However, that’s not the ultimate! "As the wealth increases insurance requirement decreases and not the other way around" Maheswari comments. Otherwise, it will a case of over-insurance.
Owing to the fact that we are making assumptions in the future, it is necessary to understand calculating term insurance in this method is not an exact science or by the book. However, this method is effective to estimate your average term insurance needs.