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