Term Insurance: How Big Should Your Cover Be?

The loss of a loved one is irreparable. If, however, it is the loss of the family’s breadwinner, it can strike a massive financial blow apart from just the emotional blow. With time people tend to recover from this loss and pain but if it is accompanied by the loss of the family’s safety net in regards to finances, it might take much longer to recover fully. Circumstances like these that lead to the loss of the financial cushion of the family stress on the importance of having term insurance.

We certainly need a term life insurance cover however, the million- dollar question remains as to how much cover is ideal for you? If this question keeps you up at night, you have reached the right place. In this article we try to answer this question by offering some of the factors one should consider before choosing their term insurance cover.

While buying an insurance cover, it is imperative that you remember that the aim of buying insurance is to offer financial support to your loved ones or dependents in your absence. In the event of your unfortunate demise, chronic illness or disability due to an accident, you will need someone to substitute your earnings so that your future alongside the future of your family is safe and secure. The cover you choose should be adequate enough to aid your family sail through the troubled waters while maintaining the standard of life that you would provide for them. This decision thus becomes extremely difficult and confusing. One needs to make a well-informed decision as it concerns the future of your family. Begin by clearly identifying the future financial goals of your family and yourself in order to estimate the right coverage for you.

Ideally, it is suggested that a term insurance cover should be approximately 15 to 20 times your annual income. This is the view of industry experts. It seems overwhelming but it really is not. Here are some of the factors worth considering when you decide to opt for an appropriate term insurance cover:

The current annual income: This is the primary factor one should take into consideration before deciding the amount of coverage you require from your life insurance. Traditionally it was suggested that 10 times an individual’s annual income is enough for a life cover, the current scenario has changed that figure. With the economy ravaged by inflation, and the consistently rising cost of living warrants that one chooses a cover that is at least 15 times their annual income.

For instance, if you currently get AED 500,000 per annum, pragmatically you should choose a term insurance policy that offers a cover of AED 10,000,000. This amount seems exorbitant, but it will be appropriate to cover your family’s annual expenditure while maintaining their lifestyle when you are no longer their as their pillar of support.

Your Age: your age plays a deciding role in making the choice of an appropriate coverage of term insurance. For younger individuals who are somewhere in their late twenties or early thirties, you will soon be taking on the responsibility of being your family’s sole breadwinner. Currently you might have fewer assets and more liabilities. But as you grow older and save more, your assets will be equivalent to your liabilities. Hence during your older years, you might need less protection as compared to the younger years.

The good thing however is that being young has its benefits since you get a higher cover at a more affordable or economical price. Your premiums will also be calculated fairly lower if you start early unless you work in a risk prone job profile like a sky diving instructor or even an aircraft pilot.

Different stages of life have their different requirements. As a result, even though you have already chosen your insurance cover, you should periodically review it to fit your new needs. Here is a basic rule of thumb for picking a life cover on the basis of different age groups:

Your financial liabilities: Financial liabilities imply your outstanding debts and loans that are another very important factor to consider while choosing the right term cover for yourself. If an unfortunate event takes you away from your family, they will have a difficult time paying EMIs alongside the everyday expenses, especially if you were the only income earner in your family. Thus, the coverage should always be such that it is enough to take care of all your current financial liabilities.

Any liquid financial assets or even near- liquid assets could help your family in covering these liabilities. For instance, the bank deposits, mutual funds or stocks bought can help meet the liabilities. You should thus take the estimated market value of these assets into consideration when calculating the ideal cover you need and then deduct it accordingly.

• Loans: One cannot certainly skip this important factor while deciding the term insurance cover they need. Presently, banks and other financial institutions strongly advice getting an insurance on the loans availed. This protects you in case something unpropitious happens. For instance, companies suggest that you insure your expensive gadgets when you buy them. A car loan or other personal loans too get insurance on them. If you have any unprotected loans, you must take them into consideration while choosing the right coverage. This way the loan will be paid off even in your absence without adding to your family’s woes.

The current expenditure of your family: The standard of life that each individual has is directly related to the income they earn. Your loved ones are used to a certain level of lifestyle that you provide for them. Due to any forlorn luck, if your family is forced to lower this standard of living substantially, it will be extremely problematic and difficult. Downgrading on the way of life that one is used to also takes times but even then, some basic necessities have to be met regardless of the circumstances. While choosing your term insurance cover, you can compute the expenditure required to be able to meet these basic requirements so that if an unfortunate event befalls your family, they are spared at least any financial suffering alongside the emotional agony.

Simply note down the current expenses and then calculate the cost of those expenses that are absolutely vital and are required on a monthly as well as the annual basis by your family in order to choose a coverage that helps in efficiently running your family’s chores.

The financial goals: Your future financial goals play a massive role in helping you decide what kind of coverage you need from your term insurance. The whole reason why buying a life insurance is important is that you can ensure that your family’s lifestyle is not compromised after you are gone unexpectedly. This means that you have to plan ahead for all your future goals as well as that of your family’s. For instance, if your child wants to pursue higher education abroad, planning for their wedding r buying a family home you have been dreaming of, all these require a significant amount of money as well as financial planning. The term insurance cover you choose should therefore factor in these goals for the future. It is also wise to take the economy into consideration as you do this. So do not forget to keep the impact of inflation on your mind.

• Your child’s education: Everybody’s child is the apple of their eyes. WE would do anything to ensure their happiness. Their education similarly is extremely important to us and plays a significant role in making their future secure. All parents want their child to get the best education but sometimes it can come at a hefty cost and thus it is necessary to be prepared for such expenses in advance. Keep this in mind while you calculate the number of years in which your child’s education will be complete and the approximate amount you need to fund their dreams and aspirations.
• Your child’s wedding: Weddings are traditionally an expensive affair. It is an occasion of celebration and people like to leave no stone unturned if it is their child’s wedding. All of it however can be costly and one needs to plan such expenses in advance. Having this in mind, it is best to ensure that your family can still enjoy without any financial constraints even if you are no longer around. Calculate an inexact figure that while opting for a term insurance cover to keep the wedding bells ringing!

The riders: The insurance industry is highly competitive and this offers advantages to the customers. Each company tries to outdo the other in their bid to stand out. They do this offering exclusive riders with their policies. These riders come at a cost but can be helpful on the basis of your specific requirements. This makes checking whether the riders that come with your policy enhance the cover or not. If not, you can choose to leave it and thus reduce an unnecessary expense on your term insurance policy. But we consider these riders highly important so make your decision after a careful thought. For instance, the premium waiver rider can be extremely useful. It waives all the future premiums in case the policy holder gets disabled or critically ill. Similarly, the accidental death waiver adds an additional sum to the assured sum and thus offers extra support to your family financially.

The premiums: Buying a term insurance policy means having to pay monthly premiums as decided by the payment cycle you chooses. Buying full coverage is a good idea but some people go over and beyond by selecting more cover than they need. This inadvertently means paying more premium. As a result, it is important to select a cover that is just right for you such that your premiums are easily payable and fit in the disposable income you have. Defaults in making premium payments can cause your policy to lapse, leaving you and your family uninsured.

Your assets: Deciding how big your term insurance cover also depends upon the number of assets you have already accumulated. Deduct this amount from your future financial requirements and choose a relevant cover. For example, if you have taken up a car loan of AED 500,000 and you were already able to pay back AED 200,000 then the remaining AED 300,000 will have to be kept in mind as you attempt to calculate your insurance cover.

For how long do you wish to be covered: This last factor is also an important question one needs to ask oneself while deciding their term insurance cover. Choosing the policy tenure after careful calibration is a must. Any insurance cover that stops offering coverage once you reach the age of 50 or above, is surely not the best one to choose. Realistically speaking, one should buy a life insurance cover in the early stages of one’s life and they should pick a cover for the maximum term possible.

Steps to calculate your term insurance coverage:

Keeping the above -mentioned factors in mind, follow these steps while calculating your ideal insurance cover-

• Take into consideration the monthly income of your dependents
• Take into consideration the monthly expenses of your dependents
• Carefully evaluate your liabilities
• Meticulously assess your important goals in life
• Take into consideration a retirement corpus for the wife/ husband
• Factor in your current wealth

The Bottom Line

Calculating how much coverage one needs from their insurance policy is not some kind of rocket science. Just keep the factors mentioned above and understand what your priorities in life are before choosing a cover to offer financial stability to your family. Since you can not know how the future unfolds, it is best to pick one as soon as possible and continue to review it every few years.