Term Insurance FAQ: How to calculate how much cover you need? When should you stop? Who can skip it entirely?

Term insurance is often considered the foundation of a sound financial plan, yet many people remain unsure about how much cover they actually need or how long they should stay insured. Here are the key things to look at

What is a term insurance policy?

A term insurance policy is the simplest and most affordable form of life insurance that provides financial protection to your family if you die during the policy term. In return for regular premium payments, the insurer pays a pre-decided sum assured to your nominee in the event of your death.

However, unlike traditional life insurance plans, term insurance does not offer maturity benefits if you survive the policy period.

How long to should you hold your term insurance?

“We advise people to buy term insurance for the duration during which their family members would depend on their income to meet financial goals or to pay the loans. Once they have enough assets that they can meet all their goals including retirement as well as pay off all their loans then the coverage has done its job and is no longer necessary,” explains Abhishek Kumar, SEBI-registered Investment Adviser (RIA) and Founder of SahajMoney.

Who does not need a term insurance?

For those who do not have liabilities or other yet-to-be-fulfilled responsibilities, however, a term insurance cover with a tenure extending into their 60s or 70s is simply not needed though life insurance companies do offer long-term term policies,

For example, a 68-year-old retiree with no outstanding loans, a fully paid-off home, sufficient retirement savings, or a single 55-year-old with no dependants and enough savings to cover future expenses do not need term insurance.

How to calculate it and what factors to consider?

“One should first start with determine the age by which their longest financial responsibility would end and then buy the term plan till that age. The key factors is to include their remaining working years, the number of years until their children become financially independent, the remaining tenure on loans as well fund their spouse's long term financial security,” advises Kumar.

Here how you can calculate it:

Estimate your family’s living expenses: Calculate your dependents' current monthly household expenses and multiply the amount by 150. This accounts for the family's future living costs, considering inflation over the years.

Add all outstanding liabilities: Include the total amount you owe on home loans, personal loans, vehicle loans etc.

Subtract your existing financial assets: Deduct the available investments and savings that you have - such as fixed deposits (FDs), mutual funds, stocks, and other liquid assets.

Factor in major future financial goals: Add the amount required to meet key milestones in coming years, such as your children's higher education, marriage, etc.

Provide for your spouse's retirement: Include the retirement corpus you would like to leave behind so that your spouse remains financially secure .