This guide breaks down what term insurance is, why it’s crucial for financial planning, and how much coverage you actually need for financial goals like your child’s education, home loans, and retirement planning.

📚 Table of Contents

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• What is term insurance and why do you need it?
• Why do you need term insurance for your investment goals?
• What is the minimum term insurance coverage amount that you need?
• Is term insurance only for investment goals?

What is term insurance and why do you need it?

Term insurance is a type of life insurance that pays a benefit to the named beneficiaries in the event of the insured person’s death, as long as the policy is active. The purpose of term insurance is to provide financial protection for the policyholder’s loved ones in the event of their unexpected death, helping to cover daily expenses, future goals such as children’s education, and loans like home loans.

It is a straightforward insurance product, similar to car insurance, in that it only pays out in the event of a specific occurrence (death) and does not have a savings component like other types of life insurance. Term insurance offers high coverage at a low cost and is the cheapest insurance plan that you can purchase to protect your family’s lifestyle and financial goals in case you die.

Insurance spreads financial risk across a large pool of policyholders, reducing individual financial burden. Since many people buy insurance, only some are expected to die within the policy’s coverage time. However, it should be present at least for all earning members of the family before retirement age.

The concept of term insurance and why you need it has been covered in detail in this article: Term life insurance: what, why, how much to get and from where?.

Why do you need term insurance for your investment goals?

Term insurance protects against loss of income. One of the uses of that income is investing for goals like children’s college education, retirement, house purchase etc.

If you die prematurely, your family no longer has your income to cover these goals.

While it can be argued that a dual-income household will be able to adjust retirement expenses, it won’t be easy to assume that future expenses like children’s college and fixed expenses like housing costs (maintenance, household help, electricity etc.) will be adjusted to be funded from a single income source. This becomes all the more important if the spouses have a large difference in incomes.

Therefore, it is important to calculate the impact of your financial goals to be sure that your insurance coverage is sufficient.

Related:
Do not make these common mistakes while buying a term insurance policy

What is the minimum term insurance coverage amount that you need?

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If you are using the comprehensive Google sheets-based goal planner then you will see the minimum term insurance you need to have based on:

• the shortfall of current goals. If income stops, this amount, if invested, will fund current goals
• the amount needed to sustain a retirement-level lifestyle, including inflation adjustment, for the period income was expected to be there.

This figure is the minimum since you need to add any ongoing outstanding secured loans (like home or car loans) or loans where family members may be co-borrowers to this coverage amount. This means that if you have 30 lakhs in an outstanding home/car loan or an educational loan of 10 lakhs with parents as co-borrowers, add those amounts to the term insurance coverage.

There is another calculator that you can use if you want a quick and free solution:

This article has the complete details: How to calculate term insurance coverage amount?

We will use Google sheets to create a simple calculator for this calculation. There is a link to download a pre-filled copy of the Google sheet via the button below.

Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.

Get the Sheet

Please refer to the term-insurance tab of the sheet once you open it.

Is term insurance only for investment goals?

If you have a home loan or similar large amounts due say via a car or educational loan, then it is important to cover those as well. Specifically, a home loan carries several risks starting from the moment you borrow money:

• What happens if you lose your job or become too ill to work?
• What if your house is destroyed by fire or damaged in an earthquake?
• What if you die and there isn’t enough money to cover the home loan?
• What if interest rates rise and you can’t afford the monthly payments?
• What if having a monthly home loan payment stops you from taking career risks like changing jobs or joining a startup?

To mitigate some of these risks, there are insurance policies:

• Property Insurance: Covers damage to your house from events like fire or earthquakes.
• Loan Insurance: Covers your loan payments if you die and term insurance is the cheapest insurance product to cover your loan.

The Arthgyaan calculator allows you to add outstanding loans to understand your term insurance coverage amount.

Related:
Review: LIC Digi Credit Plan (UIN: 512N358V01) as loan insurance for your dream home

Read more on this here: Understanding Insurance Requirements for Home Loans in India: What’s Mandatory and What’s Optional?