If you want a financial safety net for your family, a term insurance plan is one of the best options to consider. If the unexpected happens and the sole earner of a family dies, their term plan can protect the family with the sum assured. For this to work well, you need to select the right coverage amount; otherwise, you can stay under-protected or struggle to pay the premiums. Keep reading to explore choosing the right coverage for a term plan.
How to Choose the Right Sum Assured for Your Term Insurance Plan?
Follow this step-by-step guide to discover the way of assessing the correct term coverage:
Step 1: Evaluate Your Future Earning Years
To start, you can consider the number of years you are going to continue earning for your family. This is important because a term insurance plan can serve as an income replacement tool. Depending on how many years of income it has to replace, the adequate sum assured will change.
Suppose you are 28 right now and will retire at 60. Your future earning years are 32. This duration will impact the sum assured.
Step 2: Examine Outstanding Debts and Monthly Expenses
The next step is calculating the total amount of outstanding loans such as car, home, or any other financial obligations you have. Along with this recurring expenditure, you should also consider monthly expenses at this stage.
To ensure that your family maintains its current lifestyle even after your sudden demise, you need to factor in monthly household expenses, medical expenses, education fees, groceries, rent (if applicable), utility bills, and other lifestyle expenses.
Step 3: Factor in Annual Expenses
The previous step will help you with this stage, which is when you determine the annual financial outgoes. Once you have factored in the monthly ongoing expenditures, you should also consider the periodic expenses, such as the purchase of goods, gifts, and vacations.
The yearly expenditure will guide you in determining the sum assured, as you may need coverage on a year-on-year basis. Consider inflation, plot recurring outgoes annually, and calculate the present value of the total cost using current interest rates.
Step 4: Consider Major Life Changes and Goals
Visualise all the major life stages of your family and examine the lump sum financial requirements. These can include higher education expenses, wedding expenses, retirement, overseas travel, etc.
Moreover, if you foresee increasing recurring expenses, you should add that, too, to the cash flow. For example, if you are planning a child two years from now, it can drastically change your monthly expenses.
Step 5: Plan for Emergencies
It can be challenging to tackle unforeseen circumstances like loss of job, medical emergencies, automobile repairs, and home renovations. These can deplete your savings or strain your current cash flows by demanding immediate financial action. Therefore, building an emergency fund is crucial to prepare for such situations. At this stage of determining the ideal sum, you should factor in the amount of emergency funds you have to amass.
Step 6: Consult a Financial Advisor
At this stage, you have a very good idea of your financial requirements and the premiums you can continue to pay for a term period. However, it is always a good idea to let an expert take a look at the data and give you an honest opinion.
A financial advisor can give sound advice on how, when, and where to invest. He/she is experienced enough to offer suggestions on your overall financial strategy. Therefore, you should consult an advisor to remove any doubt and ensure a fail-proof assessment of your term insurance plan coverage amount.
The Bottom Line
In the end, if you follow this guide, you can get your term insurance plan coverage amount just right, which is important for several reasons. With adequate yet not superfluous coverage, you would be able to ensure financial safety for your family and allow their aspirations and financial goals to be fulfilled without burning a hole in your pocket.
