How to decide on right term insurance

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Amit, working at an IT company, is planning to buy term insurance. After he looked up on Google a couple of times, he started getting flooded with messages to buy term insurance plan of Rs 1 crore. When Amit spoke to the insurance agent, he too quickly advised him to buy a cover of one crore rupees.

But does Amit need an insurance cover of Rs 1 crore?

All life insurance companies seem to be promoting their term plan cover of Rs 1 crore only. Big celebrities and their punch lines force you to think that you are making a mistake by not taking Rs 1 crore insurance.

On top of this, big insurance cover are offered according to the reach of your pocket.

Bumper insurance of Rs 1 crore at a monthly premium of Rs 490, 554 or Rs 635 surely sounds good…Although, all this is nothing but a marketing gimmick  of insurance companies… because the insurance amount cannot be fixed like this.

Nisha Shanghvi, Director of Promore Fintech says that insurance cover depends on the person’s annual income, liabilities, responsibilities and future financial goals… In such a situation, not everyone needs a term plan that gives a cover of Rs 1 crore.

So how do you decide the insurance cover?

There is a thumb rule to calculate the insurance cover. You must have an insurance cover of 10 times your annual income. Along with increasing financial responsibility, the size of the cover should also increase. Understand it this way. If Amit has an annual income of Rs 6 lakh, then he should take a term plan with a cover of Rs 60 lakh. If Amit has two children and their education expenses in the next 5 years will be Rs.10 lakh, then this amount should be added to the cover. If Amit has an ongoing home loan, the outstanding amount of which is Rs 20 lakh, then this amount will also be included in the insurance cover. Therefore, a term plan with a cover of Rs 90 lakh would be suitable for Amit.

Similarly inflation should also be kept in mind.

Term insurance is usually for a long period of 15 to 30 years. If you take a cover of 1 crore rupees now and the average annual inflation is 5 percent, then after 15 years this amount will remain equal to 48 lakh rupees. Similarly, after 20 years, the value of one crore rupees will be 37.38 lakh, after 25 years it will be 29.53 lakh and after 30 years it will be 23.13 lakh.

If inflation rules at an average rate of more than 5 percent then the value of this amount will be even less.

So Money9 advises to buy term insurance but don’t be fixated on Rs 1 crore.

Rather, decide according to your need. During this, the effect of inflation should be included. Keep in mind that the average cost of higher education in the country is increasing at the rate of eight percent annually.

If the child is planning to do B.Tech and the current expenditure is Rs 10 lakh, then after 10 years it will require Rs 21.58 lakh. In such a situation, when the annual income increases, the insurance cover should also be increased.