What is Term Life Insurance

A term insurance plan provides coverage for your family in case of eventualities such as death.
One may opt for a term insurance plan to take care of their loved ones even in their absence.
But the ideal cover of the term plan depends upon the lifestyle, the number of dependents, income, and expenditure, investments portfolio, future goals, etc.

So what is the ideal term insurance plan?

The ideal term plan is quite subjective and varies from household to household. As mentioned previously, there are several factors determining the appropriate insurance coverage for yourself.

Different types of policies and various ways of calculating might intimidate you. But with the right guidance you will be able to opt for the perfect term plan with ease.

Most financial advisors recommend these two popular methods for calculating the ideal term insurance plan:

1) Rule of thumb: This is where you multiply a number ranging from 10-15 with your annual income to get the insurance cover. But this method is clearly not an effective way of coming up with the ideal result as it does not take into account the substantial change in the living costs due to inflation, income and expenditure changes etc.

Hence, in the long run, if insurance is calculated using this method, it is likely that your dependents might run out of money.

2) Income replacement method: Under this method, you calculate the amount needed by your family to sustain the lifestyle even in your absence. This is done by analysing your current income and the number of years you seek protection for.

The factors which are used in this method are your current age, coverage duration, your monthly income and your financial obligations (sometimes).

However, this will only give you a partial outlook of the amount your family actually needs to sustain their lifestyle.

At ZactorTech, we include your future goals for your dependents, your investments, and your financial obligations to ensure that no dynamic is left behind.
By adding these additional fields, we aim on enhancing the accuracy of the calculated coverage amount and provide you with a comprehensive and personalised term insurance plan.

Thus, our calculator does the work of coming up with the figure for you using the following inputs:

1) Current age: This is your current age which should be in accordance with your identification proofs such as an Aadhaar card, PAN card, etc.

2) Cover till the age of: The term plan policy will protect you until this specified age. It is also the age till which your dependents need your financial assistance. Generally, it’s up to 65-70 years.

3) Monthly expenses: This is your estimated monthly expenditure. How much do you spend on a monthly basis? (Note: Exclude your EMIs and your monthly savings amount).

4) Outstanding loan amount: How many outstanding liabilities do you have? This is your total loan amount. To prevent such financial obligations from being a burden to your family, they will be factored into the coverage amount.

5) Children’s life goal: This factor includes the current costs of your future goals for your dependents. It could be for your child’s education, their dream wedding, etc.

6) Existing investment portfolio: ZactorTech uses this factor to analyse whether any of your current obligations can be paid off using your existing investments.

6) Inflation, risk-free rate of return, etc. are included to consider the fluctuations of the market. It is assumed that the annual inflation rate is 5% and the risk-free rate of return for safe assets is 6%.

After you enter this information, you’ll get the following output known as

The insurance cover: This is the estimated coverage that your family will need in the long run based on your lifestyle, liabilities, investments, and planned retirement age.

Let’s understand the functioning of the calculator using the example of Z:

Z is actively looking for the perfect term insurance plan which would cover the needs of his family after his demise and these are his key details:

Z being 30 years old, he wants coverage till the age of 65.

He earns 12 lakhs per annum. The monthly expenses excluding EMIs and investments add up to INR 50,000

His liabilities are approximately INR 40,00,000 and the current cost of future goals which include his plans for his children amount up to INR 20,00,000.

The current value of his investment portfolio is INR 5,00,000.

The annual inflation and the risk-free rate of return are 5% and 6% respectively.

To illustrate the impact of inflation @5%, Z’s current monthly expenses of Rs. 50,000 will rise to Rs. 2,75,801 in order to sustain the same lifestyle when he reaches the age of 65.

If Z uses all of the following factors he should get a cover of ₹2.65 crores.

This indicates that the suggested coverage of 2.65 crores will be sufficient for Z’s dependents till the age of 65, provided that they invest in a risk-free asset and utilise the interest and principal amount to maintain their same lifestyle.

Therefore, this amount projected would be his ideal term insurance plan.

Lastly, it is always recommended to assess your situation thoroughly and consult a financial planner.

Therefore, you can manage your finances confidently using Zactor Tech-An all-in-one digital platform for personal finance where you can benefit from personalised insights for your financial well-being.