Life is a series of ups and downs; no matter how hard we try, it remains unpredictable. If you are the primary breadwinner or contribute financially to the household, then any untoward thing happening to you can affect your family significantly. To deal with this uncertainty, you can financially safeguard your family by availing of an online term plan

This will ensure they have the necessary financial means to stand on their feet if you are not around. But what is a term plan? It is the purest form of life insurance, where the insurance company pays out a sum assured to your dependents in case of your untimely demise within the policy tenure. This ensures financial protection for your family in the future. But buying a term plan is not the end of this process. A periodic review of term insurance coverage is essential at different stages in life to ensure that your coverage is sufficient. Here’s learning more about the same below. 

When and why do you need to review your term insurance coverage

With age and multiple life changes, reviewing term insurance coverage is a must to stay updated with evolving future requirements of the family. Here are some reasons that you should keep in mind: 

  • Term insurance coverage should be reviewed if you get married or have children. This could also be the case if your parents retire from service and depend on you financially. Whenever you have more dependents, reviewing your coverage is a must. 
  • Reviewing coverage is also recommended if there is an increase in your liabilities. Think of it this way- if you pass away suddenly, your family members will have to repay your outstanding loans and other debts. Hence, you should ensure that there is sufficient coverage for this purpose. 
  • Many other situations warrant a review of overall coverage. Suppose your spouse leaves a job or other family members move in to live with you. You should review your coverage accordingly. 
  • If you start earning more and elevate your lifestyle, your coverage should also be reviewed accordingly. This is necessary since your family will need a higher sum of money to maintain the same lifestyle in case of your demise within the policy tenure. 
  • If you also wish to maximize your tax savings, you can opt for more coverage to ensure a higher premium amount and greater deductions under Section 80C. Note that the limit for such deductions is ₹ 1.5 lacs per year. Furthermore, the payout will be taxable if your premiums exceed 10% of the sum assured (if you bought the policy after 1 April 2012). 

Staying underinsured is perhaps the biggest mistake that you can make. Avoid it with a calculated review of your term insurance coverage. But how do you work out the coverage amount suitable for your needs? Here’s learning more about it below. 

How to calculate the right coverage amount 

You need more than just reviewing your term insurance policy and the coverage amount. You should also choose suitable coverage that fits your needs in the best possible manner. How do you calculate the same? You can go by a general thumb rule in this case. Those in the 25-35 age bracket can choose an amount 15-18 times their current annual income and then add their current outstanding loans. For example, you earn Rs. 12 lakhs per year and have an outstanding home loan amount of Rs. 30 lakhs. You should go for a minimum coverage amount of Rs. 2.10 crore (12 lakh x 15 + 30 lakhs). 

For those in the 35-45 age bracket, coverage of 10-15 times the annual income is generally deemed sufficient while also adding outstanding liabilities. So, in this case, assuming the same income and liabilities, the coverage requirement will be Rs. 1.5 crore (12 lakhs x10 + 30 lakhs). 

You can also opt for a more extensive calculation framework that will take the following aspects into account: 

  • Monthly expenditure (without savings and investments)- A
  • Inflation percentage- B
  • Present age- C1
  • Age of retirement- C2 
  • Number of years that you have left till retirement- C
  • Future expenditures like higher studies, weddings, and so on (factoring in inflation)- D
  • Your current savings, including bank accounts, FDs, RDs, shares, and so on- E
  • Your existing loans and liabilities- F
  • Your current life coverage (if you have multiple policies, then add the sum assured)-G

This calculation does not take any fixed assets like homes, vehicles, jewelry, and land into account, along with expenditures after retirement. The formula that you can use will be the following- 

[ A x 12 x (1- (1+B/100)^C) / (1-(1+B/100)) ] + D – E + F – G

This will help you find a suitable coverage amount to meet your future needs. Getting the right coverage is essential for the reasons outlined above. Invest a little time and effort into working out the same while reviewing your term insurance policy.