How much term life insurance do i need?

Mubarrah · October 18, 2020, 2:49pm

If you want to buy a term insurance policy, you will surely think that how much term life insurance do I need? The coverage amount in term life insurance should be 10-15 times the annual expenditure of the family or 8-12 times the annual income of the policyholder. However, it also varies according to the term of the policy that one buys.

Life insurance for family

Brief introduction to life insurance

Life insurance is a legal contract between an insured and an insurer. Insured pays regular premiums on a monthly or annual basis and the insurance company pays guaranteed death benefit to the beneficiary of the policyholder.

To know the details that how does life insurance work, one must know about the two main types of life insurance. Key points of permanent insurance and the term life insurance have been given below, along with their differences:

	Permanent life insurance
Coverage	Life time coverage
Components	Policy premium, Cash-value plan, Death benefit
Cost	High premiums
Tax implication	Taxable in some situations
Cash withdraw	Yes
Death benefit	Fixed
Convertible	No
Medical exam	Yes, medical exam is required

A general overview of term life insurance:

	Term life insurance
Coverage	Offers coverage for a specific term (1-30 years)
Components	Policy premium, Death benefit
Cost	Low premiums
Tax implication	Completely Tax-free
Cash withdraw	No cash-value plan, just death benefit available
Death benefit	May increase or decrease
Convertible	Yes, convertible before expiry
Medical exam	No medical exam needed

Point to note
Permanent life insurance and term life insurance differ by the availability of cash-value plans. Cash value is a part of permanent insurance and not included in term life insurance. Term insurance expires after a certain time.

How does term life insurance proceed?

A person who is interested in buying a policy and chooses to go for a term life insurance policy, he must investigate first that what is term insurance and how it works? This background knowledge will help him to utilize the policy in the best possible way.

Term life insurance policy offers the coverage for a pre-decided term and gets expire when the term ends. No matter if you die just the day after expiry, if the policy has not been renewed or converted, there will be no money available as a death benefit.
Term can be decided by the policyholder and may range from 1 year to 30 years.
This type of coverage is beneficial for the young people, who can get more benefit by paying low premiums.
When the policy term is near to expire, it can be renewed for the next term.
If the policyholder wishes to convert it from one form to the other, e.g. from term insurance to permanent insurance, he can surely go for this. Moreover, the policy can be terminated if not needed anymore.

How does decreasing term insurance work?

You are a policyholder and you don’t have enough information about the types of term insurance, you may unintentionally indulge yourself in a decreasing term life insurance without knowing that how does decreasing term insurance work?

It’s a unique kind of term insurance that is chosen by rare kind of people, who don’t need a handsome death benefit because of fewer expenses.
In decreasing term insurance, the death benefit decreases with the increasing age of policy and mostly bought by people have to pay personal debts or mortgage loans

Difference in term insurance and group term insurance

Although they both offer coverage for a specific duration of time, yet there are few differences. One may get confused that how does group term insurance work and how it differs from traditional term life insurance if he doesn’t know enough about these two.

Group term life insurance is a type of term insurance that provides insurance coverage to a group of people instead of a single person.
Usually the companies or organizations buy this policy for giving the coverage to their employees.

Group term life insurance

How does 20-year term insurance work?

Insurance policy in term life insurance remains in force for a specific time duration that may vary according to the choice of policyholder. The procedure of term life insurance can be understood by the example that how does 20-year term life insurance work. and how it serves the policyholder?

A 20-year term life insurance covers the 20 years of the life of the policyholder.
It’s mostly acquired by the people who have short-term needs, such as student loans, younger children, or mortgage debt.
After 20 years, the policy can be expanded or converted depending upon the choice of policyholder.

In short
Term life insurance policy remains in force for a certain specific duration and then expires, for example, 20-year life insurance. Death benefit decreases in decreasing term life insurance.

Amount of coverage for a term life insurance

Generally, the coverage for term life insurance should be 10-15 times the total expenditure of your family per year. You don’t only need to provide them financial security for two or three years, instead, it may be required for several years for them to be independent. Several factors determine the need for face-value that one may need. These factors are:

1. Amount of debt

The coverage amount depends upon the amount of debt a policyholder has to pay. It should be enough to completely pay all the debts, such as mortgage debts, personal loans, or automobile loans.

For example:

If a policyholder has to pay a mortgage loan of $150,000 and a car loan of $5,000, he would surely need a minimum coverage of $155,000 in the term life insurance policy to fully pay the total of loans. But this amount is excluding the taxes, if he has to pay some kind of taxes, there should be some extra coverage in the policy.

2. Income substitution

Most of the people who buy life insurance, do this as a substitute for their income. It should consist of enough amount to replace the income of a person and also to cover some extra expenses.
It is not bought to cover one or two years of dependent’s life; they may need it for several years until they get established. So, 8 to 10 times the annual income of supporter is enough amount for term life insurance
If there is still a confusion related to the coverage in an insurance policy, one may consult the insurance estimators to seek help regarding the confusion that how much insurance a policyholder will need.

3. Number of dependents

Coverage amount also depends upon the family members who are dependent upon the policyholder and he wants to secure their future in case of his death.
More the number of dependents, more coverage a policyholder needs to meet their requirements to make the living. However, coverage should be in the affordable range of the policyholder to keep the policy in force.

Life insurance; secure future

4. Lifestyle of dependents

What kind of living style a policyholder wants for his beneficiary or heirs, also determines the amount of coverage that he will need.

For example, a lavish lifestyle requires more coverage as compared to a modest lifestyle.

Moreover, if the dependents of a policyholder, including his parents, spouse, and children are unable to earn their living throughout their life, they would need a more expanded face value to meet the necessities of life.

Here is an example of the calculation for the required coverage:

Type of Expense	Example	Amount needed
Family expenditure	Household, college or school dues	$ 500,000
Liability expenses	Mortgage loan	$ 50,000
Future goals	Marriage/ education of children	$ 100,000
Personal loan	—	$ 600,000
Total insurance cover one needs		$ 1,250,000

Summary
Coverage for term life insurance should be 10-15 times the annual expenses of the family or 8-12 times the annual income of an insured.

Frequently asked questions

People usually want to know much more about insurance before indulging themselves in it. Here are the answers to some mostly asked questions by the people:

1. Should I get a 20- or 30-years life insurance?

Life insurance policy is a matter of cost. If you are not having any cost-related issues, you may go for 30-year term insurance. But, if you dot have enough budget to pay relatively high premiums as compared to the premiums of 20-year term insurance, you should go for the 20-year term insurance. It is relatively cheaper than the 30-year policy.

2. Can we take more than one term insurance?

Yes, you can buy more than one term insurance policy if you feel that the coverage of one policy is not sufficient for the fulfillment of needs.

If a policyholder buys two-term insurance policies, he can nominate different beneficiaries in each policy, and it’s not necessary at all to nominate the same person in both policies.

3. What happens if the nominee dies in term insurance?

Death is an inevitable loss and no one is immortal. There may be a situation, where the beneficiary also dies along with or just after the demise of a policyholder, before receiving the death benefit of later.

In these situations, there is a contingent beneficiary, a person who will receive the death benefit instead of the primary beneficiary. If there is no nomination or contingent beneficiary, the death benefit is given to the heirs or legal representatives of the beneficiary or policyholder.

4. What is the premium for 1 crore life insurance?

Premium rates of some insurance companies for the life insurance of one crore are tabulated below

Company name	Premium per year
Max Life insurance company	7080 Rs
HDFC life	8345 Rs
Prudential life insurance	9238 Rs
Edelweiss Life Tokio	6823 Rs
Future Generali life insurance	6830 Rs

5. Is term life insurance worth it

Most people often worry that is life insurance worth it? It depends upon the personal and financial situations of a policyholder. For example, if you have to pay a student loan and u fear for your parents to suffer from that loan if you die, then a term life insurance is surely worth it.

Similarly, if you have younger children, you should buy a term life insurance to secure the future of your spouse and children and it is worth it.

Conclusion

How much term insurance do I need? It is a must-ask question by an applicant just before making a contract for term life insurance.
Coverage for term insurance should be 10-15 times or 8-12 times the total annual income of a policyholder.
It can be estimated by the total annual expenses of the family of the policyholder and the coverage should be 12 to 15 times those expenses.

References