What is an ideal cover for your Term policy?
The first question should be obvious by now — How much money do you need to replace yourself financially?
It’s a tough question and let’s be honest — It is a bit subjective as well. But there are a few key things you have to remember here. For starters, your expenses. If your lifestyle demands a certain level of spending you will need to keep it up if you don’t want your absence to be felt. So if you’re spending 50,000 every month, your term insurance product should replace this income. And at that rate, you’re probably looking at a cover totalling 1 Crore. Let me explain why.
Think about what your family would do if they received this money. Assume they do the least sophisticated thing possible — which is probably the smartest thing to do as well.
At 6% annually, they will receive 6 lakhs each year. That should adequately compensate for your lost income. However with inflation, that 6 lakhs might start looking paltry very soon. So let’s try and beat inflation. Let’s assume the insurer pays you 2 Crores. That should get your family 12 lakhs each year. A pretty good sum overall and maybe good enough for the next 10 years. But what if you have a lot of financial obligations? Loans and that sort of stuff.
Then you should start looking at a higher cover. And while these are rough estimates, I hope you get where I am going with this. The final amount should generate enough cash flows for a reasonable amount of time to pay for all your family expenses (including EMIs) and also leave a little extra for your family. We will soon have a calculator up on Ditto. So keep an eye out for that.