Term Insurance: How To Access Long-term Insurance Needs When Purchasing A Plan

Life is unpredictable and inherently vulnerable to any misstep, disease, disaster, or accident that could affect your financial stability. To cushion any such unpredictability a person, typically the breadwinner of the family, buys a term insurance policy that can help their dependents to cope with the financial stress at the time of any unfortunate incident.

But here’s the catch: Buying a term insurance plan isn’t as simple as picking a number and calling it a day. To truly protect your family’s future, you need to take a hard look at your long-term insurance needs. Let’s understand how you can assess long-term insurance needs when purchasing a term plan.

Before that let’s understand why term insurance matters:

Term insurance isn’t just a piece of paper with a coverage amount. It’s a promise to your loved ones that they’ll have the financial stability they need if you’re not around. A term plan can be helpful under the following scenarios:

- If you have dependents relying on your income. If your family counts on your earnings to meet their daily needs, term insurance ensures they can continue their lives without financial turmoil.

- There are financial liabilities on you. Perhaps it could be a home loan, car loan, or any other debt, term insurance can help clear such obligations so your family is not burdened.

- Lack of financial corpus. If your savings and investments are not substantial enough to secure or support your family in the future, a term plan can fill this gap in need.

Finding the Right Coverage: Methods to Consider

The million-dollar question is: How much coverage is enough? According to Manju Dhake, Senior Vice President of Insurance at 1 Finance there isn’t a one-size-fits-all answer to this question. Therefore she explains multiple approaches that can help a person arrive at an amount that is right for them.

• Income Multiplier Method: This method uses your income and age to determine the coverage amount. The younger you are, the more years of income you are likely to contribute, which can directly impact your coverage needs.

• Human Life Value (HLV) and Income Replacement Methods: These methods take a broader view, assessing your overall financial situation, including your income, expenses, and dependents’ needs.

• Rule of Thumb: While not personalised, this simple method suggests coverage of 10 to 20 times your gross annual income. This method can help you get a ballpark figure.

While these methods are helpful, Dhake states that any term plan should be considered on a need-based analysis to get the best assessment of your future needs.

Mortality Protection Gap

If you want to dive deeper, the Mortality Protection Gap formula could be your answer. This calculation considers your family’s immediate and future financial needs, including inflation, life-stage responsibilities, and broader economic conditions.

Here’s how it works:

Mortality Protection Gap = (Present value of future dependent expenses + Outstanding liabilities) - (Present value of passive income + Other assets excluding primary residence)

By accounting for these factors, you can ensure that your coverage adapts to your family’s evolving financial needs over time.

Key Considerations To Know

The term insurance plan you buy today should be flexible enough to accommodate changes in your life. Whether it’s a promotion, a new family member, or an unforeseen expense, your plan should align with your evolving needs.

Says Dhake, “Determining the right coverage requires more than a rule of thumb, it demands a comprehensive evaluation of life-stage responsibilities, inflation, and long-term goals through methods like the Mortality Protection Gap.”

Therefore, as you consider purchasing a term insurance plan, take the time to evaluate your financial landscape thoroughly. For a deeper understanding, one should consult with experts, or use tools like the Mortality Protection Gap formula, and ensure that their plan is as dynamic as life itself.