Term Insurance Calculator

What is Term Insurance?

A term life insurance plan is a plain vanilla insurance product that will make a payout (known as the sum assured) to the dependents in the event of the death of the insured while the policy is in force. The policy stays in force for a fixed term and only makes a payout if the death of the insured occurs within that term. For this assurance that the insurer provides, the insured makes regular payments to the insurer known as premium. Several factors go into the computation to arrive at the premium such as sum assured, medical history and lifestyle (such as smoking). However, right at the top of the list is the age of the insured.

Term plans are known to be affordable and even more so if the insured is young, giving one the ability to lock into a lower premium for a higher sum assured. They frequently come with options related to premium payments, sum assured, benefit payout structure etc. and also optional riders.   Although tax benefits should not be a factor in an insurance decision, the icing on the cake is that life insurance premiums are deductible under section 80C of the Income Tax Act.

Benefits of Term insurance

The main objective of a term plan is to replace your financial contribution to your dependents going forward. Even if your family is not financially dependent on you, the presence of a loan that you are servicing such as a home or vehicle loan, calls for a term plan so that your family is not saddled with the liability, if an unforeseen event were to occur. 

Therefore, the primary purpose of a term life cover is to replace the contribution of the insured to the family’s finances in the event of death of the insured. It is not an investment that should be expected to generate returns but an expense to be incurred by anyone who has started earning and has family members that are financially dependent on him / her. 

Consider this – Mr A who is currently 40 years old, has 20 years to go to retirement. He has, a couple of years ago started putting away for the college and higher education of his daughter who is currently aged 7. In the event of Mr. A’s untimely demise and lack of or inadequate term insurance cover, his daughter’s education fund would be in jeopardy. This is an example of an eventuality that a term insurance cover would take care of financially.

Understanding the uses of a Term Insurance Calculator

Your term insurance is unique to your life and family. A small number may leave your family under-prepared. At the other extreme, a large number will be a needless drain on your finances in premiums paid, since premiums aren’t returned to you in pure term plans.

This makes it important to get the term insurance cover amount just right. You will need to factor in:

•  your contribution to family finances, 
• estimate the future value of financial goals that you are working towards and 
• also consider any loans and other liabilities that you are servicing on behalf of the family.

Let’s look at an example of Mr. A. Here is how he would have to go about estimating his term insurance cover requirement.

Step 1 – What is the income you need to replace?

The first step is to estimate the monthly expenses your family or dependants need to maintain a reasonable standard of living in your absence.

• First, reduce your personal contribution to the household expenses. If your household presently gets by on Rs 1 lakh a month and your personal spends are Rs 30,000 a month, you should budget to replace Rs 70,000 a month through your term insurance plan. 
• Second, if your spouse or other family member is contributing towards those expenses, you can deduct that from the required amount. 
• Multiply these annual expenses by the number of years left in your working life, to arrive at the cover. This is the period for which you are looking to replace your income.  

Illustration: Mr A is currently 40 years old, has 20 years to go to retirement and has estimated his family’s expenses at Rs 100,000 a month, Rs 30,000 of which goes towards his own expenses.  A good starting number for his term cover would be Rs 1.68 crore (annual expenses of Rs 8.4 lakh multiplied by 20 years of his remaining earning capacity). If he were only 30, he’ll need a larger cover because he’ll need to replace more years of income. If he was 50, he’d need less.

But the above calculation does not budget for inflation. To get to a realistic term cover, therefore, adjust your family’s expenses for inflation for the period for which they need income replacement.

In the above illustration, if Mr A budgets for 5% annual inflation, his family would start at Rs 8.4 lakh a year but end up spending Rs 21.22 lakh a year 20 years from now. Adding up the likely expenses for the family over the next 20 years after budgeting for inflation, leads to a term cover requirement of Rs 2.77 crore.

The number can be reduced if you expect any of your dependants to stop relying on you in future. In our illustration, suppose Mr A’s 10-year old daughter can be expected to become financially independent by the time she’s 25, Mr A can budget for his family expenses to shrink by say, 20%, after year 15. If he has dependant parents with a remaining life expectancy of 15 years, that could call for downward revisions too.

Step 2: Meeting financial goals

Financial goals that you were hoping to fund with your future savings need to be funded by your term cover too.

Let’s assume Mr A was investing towards a Rs 30 lakh education fund for his daughter’s graduate and post graduate degrees when she turned 18. His early demise will leave this goal unfulfilled. So, this risk must be mitigated by adding in the unfunded portion of the education goal into the term cover.

Suppose Mr A had Rs 10 lakh already invested in the education fund, he first needs to estimate how much this would grow to, at a conservative rate of return when the goal comes up. Assuming the daughter needs the money when she’s 18, there are 8 years to go to this goal. At a 6% rate of return, the Rs 10 lakh invested would grow to about Rs 16 lakh.

Should Mr A pass away today, Rs 14 lakh of his daughter’s education goal would remain unfunded. This should be added to his term cover requirement. Including this, his term cover need is now Rs 2.91 crore.  

Step 3: Paying outstanding loans  

It is enough to have accurate estimates of large liabilities like your home or car loan. For smaller loans such as personal loans or credit card debt, you can use a ballpark estimate of the likely dues.

In the above illustration, let’s assume Mr A has a home loan outstanding of Rs 40 lakh and a car loan of Rs 5 lakh. This would jack up his term cover need by Rs 45 lakh.

But then, in the event of his demise, Mr A’s beneficiaries would probably stand to receive his provident fund dues and other payouts from his employer. They would also receive control of his investments and the cash in his bank accounts. These can be used to partly or fully settle the debt. Therefore, these assets need to be netted out from the liabilities before assessing term cover requirement.

Suppose Mr A had total PF and other savings of Rs 35 lakh to his credit (excluding his daughter’s college fund), his net dues after adjustments for assets would be Rs 10 lakh. Only this needs to be added to his term cover requirement.

Overall, Mr A’s family would be well covered at a sum assured of about Rs 3 crore. This is the size of the term plan he needs to sign up for.

An important point to remember is that the quantum of term cover one needs is not frozen in time. It needs to change with changes in life situation, number of dependants, income levels and liabilities. Therefore, it’s not enough to buy a term insurance plan once in your life and pay premiums faithfully. You need to re-visit and add to your life insurance after significant life events, to ensure that you have enough cover to keep your family protected.

To do all of this easily and efficiently, a well-designed term insurance calculator, like ours will come in handy both to estimate how much cover you need to start with and to do checks to see if you have sufficient cover.

How to Use the Term Insurance Calculator

PrimeInvestor’s term insurance calculator will require the following inputs from you:

1. Your current age and years to retirement
2. Your family’s expenses and your expenses that are included in the family’s expenses
3. The inflation rate that you expect
4. The target amount of financial goals that you are working towards net of any investments that you have already made toward these goals
5. Total of outstanding loans and liabilities 
6. Total of any assets that can be used to meet these liabilities

Once you feed in the above information, PrimeInvestor’s term insurance calculator will tell you the ideal term insurance cover that you need.