How to calculate your term insurance plans: Coverage, Tenure, & Premiums?

One of the first things that we teach our advisors at Ditto is how to help clients with the most frequently asked question “How to calculate your term insurance plans: Coverage, Tenure, & Premiums?”

Since Ditto is an education-first platform that focuses more on ensuring insurance literacy, we believe that one of the common myths about term insurance plans needs to be broken—NO, there is NOT a ONE-SIZE-FITS-ALL approach to insurance, especially when you are dealing with a long-term financial commitment like a term life insurance plan.

This myth and its reality call for the need to provide clients with a basic layout of how the ideal tenure, coverage, and premium are calculated in term insurance policies. Acknowledging this would mean that you are stepping into the financial product-purchase journey with solid information that will keep you one step ahead in buying the best term insurance policy that caters to your current financial bandwidth and future financial requirements.

So, let’s take a quick look and see how you can compute the ideal tenure, coverage, and premium for your term policy!

How to Calculate the Ideal Tenure of a Term Insurance Policy in India?

THE WHAT

The ideal policy period for term insurance depends on your personal financial needs and situation. Term insurance provides a death benefit to support your dependents if you pass away. This can cover expenses and life goals for your family.

When choosing a term insurance plan, focus on two key factors:

1. The ideal policy period
2. The ideal sum assured

Remember, one size doesn’t fit all. Your age, income, health, lifestyle, dependents, loans, and spouse’s financial status all play a role in determining the right policy period. Make sure the coverage lasts long enough to protect your family’s financial future.

Heads up! We know that term insurance can be overwhelming – but it doesn’t have to! Our IRDAI-certified advisors at Ditto assess your term insurance requirements and can help you pick the right policy. And the best part? We don’t spam or pressure you to buy. So, talk to us today by booking a FREE call!

THE WHY?

Determining the ideal policy period for term insurance is essential. While some plans offer coverage until you turn 99 or 100, this may not be the best choice. These whole life policies can come with high premiums since they cover you for a longer time and present greater payout risks.

You buy term insurance primarily as income replacement for your dependents. Once you retire, do you really need to keep paying premiums until you're 100? It’s crucial to calculate the right policy tenure to ensure you have the coverage you need without overpaying.

THE HOW?

Term insurance providers usually don’t offer much flexibility once you buy a policy. While some riders allow for minor adjustments, you need to choose your policy tenure wisely at the start since it can’t easily be changed later.

When deciding on the ideal policy period, consider these factors:

1. Your Age: If you’re 25, your policy can last 35 to 40 years. If you’re 35, aim for 25 to 30 years. Generally, your term should cover you a few years past retirement.
2. Dependents’ Ages: The policy should support your dependents, especially until your children are financially independent.
3. Existing Financial Obligations: If you have a home loan, ensure your policy covers the remaining EMIs if something happens to you.
4. Current Financial Situation: While the death benefit is a lump sum, think about monthly expenses when deciding on the sum assured and premium. Higher coverage or longer terms mean higher premiums.
5. Purpose of the Policy: Your reasons for purchasing the insurance affect the tenure. For example:

• If you’re single and only support your parents, consider shorter terms.
• If you’re a married small business owner with no kids, factor in your spouse's age and any business loans.
• If you have a home loan, consider the ages of your spouse and children, ensuring coverage until your kids are independent and the loan is paid off.
• If you have two kids, your policy should last until your youngest becomes financially independent.

In summary, carefully consider these factors to choose the right term insurance policy period for your needs.

How to Calculate the Ideal Coverage of a Term Insurance Policy in India?

Term insurance plans aren't one-size-fits-all; they focus on the policyholder's Human Life Value (HLV). These plans aim to replace income and support a family's financial goals after the policyholder's death. Since each family's needs vary, so does the sum assured.

Key Factors Influencing the Sum Assured

1. Age and Policy Tenure: Your age indicates how many working years remain until retirement. A longer policy tenure can provide more security but may also lead to higher premiums due to increased payout risk.
2. Number and Age of Dependents: The more dependents you have, especially younger ones, the higher your coverage needs. For example, someone with two young children may require more coverage than someone with one teenager.
3. Existing Financial Liabilities: Consider your monthly expenses, loans, and EMIs when determining your sum assured. The goal is to ensure your family can maintain their lifestyle and meet financial goals.
4. Current Financial Bandwidth: Opting for a higher sum assured might seem wise, but it can lead to steep premiums that strain your finances. You don’t want to compromise your other expenses or investments.
5. Inflation Rate: Rising inflation can erode the value of your coverage over time. A ₹1 crore sum assured today may lose significant value in 25 years, so account for inflation when calculating your needs.

How to Calculate the Ideal Sum Assured?

1. Consult an Expert: An insurance advisor can help you determine the right coverage based on your situation.
2. Use a Calculator: Free online calculators can help you estimate your ideal sum assured by inputting details like your age, desired protection duration, monthly expenses, and outstanding loans.

How to Calculate the Premium of a Term Insurance Policy in India?

Term insurance plans are among the most affordable life insurance options, making them popular regardless of the policyholder's age—except for those over 60. Your premium reflects the insurer's evaluation of various factors, even if the underlying actuarial science is complex.

Key Factors Affecting Term Insurance Premiums

1. Age: Buy your term insurance in your 20s for the lowest premiums. The younger you are, the lower the risk you present to insurers, which means they offer lower rates. Plus, your premium remains locked in for the duration of the policy.
2. Current Financial Liabilities: Your existing loans and monthly expenses help insurers gauge your ability to pay premiums and determine your ideal coverage amount.
3. Coverage Amount: Your desired coverage plays a crucial role in calculating premiums. Insurers may adjust your requested amount based on your eligibility.
4. Policy Tenure: While some plans offer coverage up to 99 or 100 years, limiting your policy to around 65 or 70 years is wise. Longer tenures increase premiums due to a higher risk of payout.
5. Pre-existing Medical Conditions: Conditions like diabetes or hypertension signal higher health risks to insurers, leading to higher premiums to cover potential payouts.
6. Gender: Female policyholders pay lower premiums than males for the same coverage, reflecting their generally longer life expectancy.
7. Habits: Smokers and drinkers face premiums that can be 50% to 100% higher due to increased health risks. Insurers will require you to disclose these habits through questionnaires and medical tests.
8. Occupational Risks: People in high-risk professions, such as the military or emergency services, may struggle to get coverage or face significantly higher premiums.

Understanding these factors can help you navigate the term insurance premium calculation process effectively.

What are the best term insurance plans in India in 2024?

Why Talk to Ditto for Your Term Insurance?

At Ditto, we’ve assisted over 3,00,000 customers with choosing the right insurance policy. Why customers like Achint below love us:

✅No-Spam & No Salesmen

✅Rated 4.9/5 on Google Reviews by 5,000+ to 9000+ happy customers

✅Backed by Zerodha

✅100% Free Consultation

You can book a FREE consultation. Slots are running out, so make sure you book a call now!