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How to Calculate Life Cover Required for a Term Plan

Follow the steps mentioned below to calculate the amount of life cover that you will receive from the life insurance plan that you choose to avail. Knowing the life cover will help you set a premium that will be beneficial.

Term Insurance is a life insurance policy that offers cover for a certain period of time. The rules applicable to a term insurance policy is pretty simple. But not many are aware of the calculation of life insurance premium. Though it is not hard to calculate term insurance premium not many are aware of how to calculate the term insurance premium. It is important to know how much life insurance coverage you need to ensure that you are not over insured or underinsured when you buy the policy.

Given below is the usual thumb rule followed by many while calculating the term insurance cover needed. This is calculated based on the age of the individual, the annual income and outstanding loans.

  • Individuals aged between 25 and 35 years calculate the cover by adding their outstanding loans to 15 to 18 times their current annual income.
  • For an individual aged between 35 and 45 years, they are advised to calculate the term insurance cover by adding up their outstanding loans to 10-15 times the current annual income that they are earning.

Another way to calculate life cover needed :

Though the above mentioned way can be used to calculate the life cover needed, the method is very generic and might not give the desired results. There is another way to calculate life insurance coverage which considers a lot of factors and actually gives a bare minimum amount of life insurance cover instead of giving a range of amount.

Factors required for the calculation :

Given below are the factors that are required for the formula that is used to calculate life insurance cover.

  • A( Current monthly expenses)- This includes the actual expenses excluding investments and savings
  • B(Inflation)- This part of the formula represents the inflation. It is important to note the exact percentage of inflation.
  • C1- Current age in years
  • C2- This defines the retirement age, the age at which you expect to retire.
  • C- This defines the number of years left for entertainment( C2-C1)
  • D- This defines the heavy expenses that you might come across in the later stages such as wedding expenses, higher studies expenses and other expenses. It is advisable to count inflation while calculating this expense.
  • E- E defines the existing savings that you have including the money in your bank account, Fixed Deposit accounts, Recurring Deposit account, shares and such
  • F- F defines the existing liabilities that you might have which includes existing outstanding loans
  • G- This stands for existing life insurance cover which includes any continuing life insurance policy. This is calculated by adding the sum assured of these policies.

What is not included in the calculation!

Given below are the factors that are not considered while calculating the term insurance cover

  • Fixed Assets and long-term savings such as house, car, land, and jewellery.
  • Post retirement expenses.

Formula for calculating the life cover:

Given below is the formula required to calculate the life cover of your term insurance.

  • Formula= [ A x 12 x (1- (1+B/100)^C) / (1-(1+B/100)) ] + D - E + F - G

Life Insurance Reviews

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  • Birla Sun Life Insurance
    0.5 5.0/5 "Blown Away!"
    I have my life insurance policy with Birla Sun Life Insurance. I have a platinum policy with them. In this policy my EMI is calculated in the market rate. I invested 5 lakhs in this policy before few years. As per my calculations I would get more than 6 lakhs within February. I have already recommended this policy to many friends.
    Was this review helpful? 0
    , shimla
    Reviewed on Feb 16, 2016
  • LIC Life Insurance
    0.5 5.0/5 "Blown Away!"
    One of the agents suggested to take jeevan tarang plan from LIC. I need to pay the premium for 6 years and after that I can avail a personal loan. After the maturity the sum assured would be great and post that every year I get 45k per annum till the end. I would say LIC policy is a long term policy. Nominee would get around 10lakhs. If I do calculations the benefit is around 28lakhs.
    Was this review helpful? 0
    , hyderabad
    Reviewed on Oct 06, 2015
  • Tata AIA Life Insurance
    "Got cheated BY AIA!!"
    0.5 3.0/5 "Satisfactory"
    My experience with TATA AIA life insuarnce was very bad. The plan was excellent - Invest Assure Gold wherein I get the life cover for 72 years on a premium payment term of only 5 years. This was one of the key criteria for taking this policy. The policy was cancelled suddenly after 7 years stating premium not paid for 2 years wherein over 5 different service representatives confirmed I had to pay only for 5 years (even have calculations showing 5 year payment for lifetime benefit). Looks like they have the exact same policy with 2 options one is 5 year payment and another is lifetime payment. The premium was also high but manageable for 5 years but the same amount for lifetime is ridiculous. Didnt get proper response from the grivience cell and the policy was cancelled and balance amount returned ... also getting many calls from some agents claiming to be AIA asking for money to release bonus amount. they have policy details and hence I feel the customer data is also not safe. SCAM.
    Was this review helpful? 1
    , bangalore
    Reviewed on Apr 07, 2015
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