How to evaluate term insurance coverage and price?

May 31, 2019

I am being advised to buy term insurance of 5 cr INR with an annual premium of 1.2 lakhs INR per year for 10 years. The policy works up to 85 years. I am a 30-year-old healthy individual. How do you evaluate what is the right price, and what is the correct insurance amount for you?

1 Answer
Jun 6, 2019

There are 3 aspects to this question:

  1. The Sum Assured i.e. What is the insurance cover that you need?. Is 5 Cr a sufficient amount?
  2. The Policy Term i.e. How many years the policy will cover you? Do you need a cover until the age of 85?
  3. The Premium Payment Term i.e. how many years will you be paying premium? Should you pay upfront premium in the first 10 years or opt for regular payment until the end of your policy term?

The Sum Assured

The correct method to identify the term insurance cover required is as below:

Present Value of your financial goals + Expense replacement corpus – Your existing assets

The calculation of the above especially the Present Value of financial goals and expense replacement corpus is slightly technical and may need the help of a financial planner. Since I am a financial planner myself, this suggestion may seem to be a conflict of interest. Hence, instead you may use a thumb rule of 30 times of your annual income. Though technically not correct, this would more or less serve the purpose.

The Policy Term

Term Insurance is needed to bridge the gap between your financial goals and your assets created towards meeting those goals. Once you create the required assets to meet your goals, you don’t need term insurance anymore. In this case, the term extends till you reach 85 years. It is difficult to believe that a 30 year old who needs a cover of 5 cr will take till his 85th year to reach his financial goals. You are buying insurance which you probably don’t need. The same cover with a term which ends at the age of 60 years will be much cheaper to buy.

The Premium Payment Term

In this case, you will be paying premium only for 10 years but the policy will cover you till the age of 85. As mentioned above, you may not need the insurance after say 60 years (or after the age when you create assets required to meet your financial goals). Then you have the option to not renew the policy thereafter. In this scenario, you have already paid the premium upfront. This scenario is commonly seen while buying (or selling rather) Term Insurance as a risk cover for un-repaid home loans. Always opt for regular premium while buying Term Insurance, ie, you pay the premium for the year of cover and no more. This way, you can cancel the policy anytime you don’t want it and can rest assured that you have not paid premium already to the insurer.

To Summarize

  1. Sum Assured: Contact an advisor to find the right coverage amount for you or use a thumb rule like 30 times your annual annual income
  2. Policy Term: Most likely you won't need a cover until the age of 85. Choose a lower number like 60.
  3. Payment Term: Opt for regular payment i.e. payment every year

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