When you think about your family, all you want is their happiness and well–being. This is where a term policy is regarded as a good option today for securing your family’s financial future in the event of your unfortunate/untimely demise.
Usually, term plans offer their best value when purchased early, as you can get a high sum assured for a low premium amount. If you are considering buying a term insurance plan in your 40s, it is essential to consider the coverage you will require. You want to prevent the situation where your family members suffer due to insufficient coverage (in sync with living costs and their needs) in the future.
Let us first understand the meaning of term insurance, then look at some common methods you can use to calculate the right coverage amount for yourself.
What is Term Insurance?
Term insurance is the most basic form of life coverage. It gives you a comparatively higher coverage amount for a lower premium in most cases. There is a predefined sum assured paid out to your nominees in the event of your death within the policy period. However, if you outlive the policy tenure, there are no maturity benefits under the basic plan structure. You will have to keep paying the agreed premium at the agreed frequency for the chosen premium payment term.
You can get tax deductions on your term insurance premium payments up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961. You can also add several riders to your policy for additional safety and protection. Some commonly chosen options include accidental death or disability, critical illness, etc. These will come with additional charges that will be added to your premium amount.
How to Calculate Life Cover?
Now, before buying term insurance in your 40s, when you are already in the middle stages of your career and life, you should consider the life coverage you require. Here is a guide to a few calculation methodologies. You can use one of these three methods to calculate the amount of term policy for your family.
| Name of the method | Income Replacement Value | Human Life Value | Expenses Oriented Method |
| Meaning | This method is based on the principle that after the death of the main earning member of the family, the term insurance cover must replace their income. | Human life value or HLV is a method that is based on the current expenses and, future income, investments, and liabilities. | Like the income replacement method, in this method, you need to calculate your future expenses. In this method, you have to take into consideration whatever expenses may occur in the future. |
| Formula | To calculate your income replacement value, you need to multiply your current annual income by the years left to retire. This will be equal to your income replacement value. | There is no specific formula under this method. All you need to do is to consider your future liabilities, future income, expenses, and your future goals. By this, you will get a clear idea about the future need of your family. | Under this method, you need to calculate your daily expenditure, future goals, and any loans you have taken. After it you have to minus the assets you have, your investments and life cover if any. After this, the amount you will get will be the future expenses that you will incur. And these future expenses will be temporary if in the future your goals or expense pattern change. So you need to keep in mind that too. |
| Drawback | There is a limitation to this formula that is, it exaggerates the cover amount by including the future income, and hence in some cases becomes unreliable. | There is no certain drawback to this method, and that is why it is used by most of the term insurance companies. Also when you buy your term insurance online some websites will offer an HLV calculator too. | The limitation of this method is that it doesn’t take into account the change in future goals and expenses. |
A Simpler Calculation Framework
These are some methods to calculate the right life cover amount for your term plan. However, there is a general rule of thumb that you can use to decide the life cover required.
That is considering a value of approximately 10 to 20 times your current annual income. This will cover most of your future expenses without any complicated calculations. However, this is not the most accurate method and may vary depending on various conditions. Also, keep checking your term coverage from time to time, as due to multiple factors, your future goals and expenses may change with time. You will thus have to either get your coverage enhanced at the time of renewal or purchase an additional term policy in this scenario.