Four Methods to Calculate How Much Term Insurance You Need


What is Term Insurance?

Methods to Calculate How Much Term Insurance You Need

Factors affecting your life insurance premium 


Four Methods to Calculate How Much Term Insurance You Need

The covid-19 epidemic has demonstrated that purchasing insurance coverage is one of the most significant financial decisions a person can make. Following the pandemic, there was a surge in life insurance policies. When it comes to life coverage, term policies are the most cost-effective since they provide the most excellent coverage for the least amount of the cash. Term policies are the most basic type of life insurance, paying out the sum promised if the insured dies during the policy’s term. If the policyholder survives the period, there is no payout.

What is Term Insurance?

Term insurance is the pure and most affordable life insurance, providing coverage for a specific time called a ‘term.’ In the event of the policyholder’s untimely death, it gives financial security to their dependents. In this sort of insurance, the policyholder is not a beneficiary because the sum promised is paid to the dependent in the event of the policyholder’s demise.

A policyholder must pay a premium for the period specified; failure to do so will result in the policy lapse. Three major elements that influence the premium include age, amount of insurance, and policy duration. Furthermore, the policyholder’s medical and healthcare history are taken into account when determining the premium. If the policyholder survives to the end of the policy term, they have the option to renew the insurance for another period. Furthermore, the premium is computed based on the applicant’s age and health status at the time of renewal. 

Methods to Calculate How Much Term Insurance You Need

Human Life Value Method

This strategy is concerned with a person’s financial or Human Life Value to their dependents. The financial worth of a person’s life is simply the current value of the future earnings they might anticipate making for their family. The inflation rate is also taken into account when determining a Human Life Value as it is a projected number. As a result, according to this theory, a person’s life insurance coverage should be proportional to their Human Life Value.

Several insurance firms use this approach to determine how much life insurance coverage a client requires. Most insurance firms’ websites provide a Human Life Value Calculator that will automatically calculate the economic value of your life to your family once you enter the necessary information. As each insurance company calculates Human Life Value differently, the amount of Human Life Value may range from one insurer to the next. But, most insurance firms take the following things into account:

  • Age
  • Gender
  • Annual income
  • Current savings
  • Outstanding loans
  • Retirement age
  • Current life insurance coverage

Income Replacement Value Method:

When the single earner dies, a family may face unforeseen financial difficulties. The Income Replacement Value technique focuses on restoring the policyholder’s lost income so that their family may maintain their current lifestyle even if the policyholder is not there.

While there are other methods for calculating the Income Replacement Value, the most basic and generally used is Current yearly income multiplied by the number of years remaining to retire. 

Expense Replacement Method

As the name implies, the Expense Replacement strategy takes into account a person’s day-to-day costs, outstanding debts, and significant life events for family members such as a child’s schooling, marriage, wife’s retirement, and so on.

So, the sum of all these potential bills is the amount your family would require in the future. And, after deducting your current assets and investments, you will have the amount of life insurance coverage you need. However, assets that the family would not sell, such as the house you reside in, should not be counted.

This approach is helpful in assessing your post-retirement needs in addition to determining your life insurance coverage requirements. 

Underwriter’s Thumb Rule

According to the Underwriter’s Thumb Rule technique, a person’s life insurance policy should be a multiple of their yearly income, based on their age. For example, if you are between the ages of 21 and 30, your life insurance policy should be 25 times your yearly salary. If you are between the ages of 31 and 40, your life insurance coverage should be 20 times your yearly salary, and so on.

Some insurance consultants recommend a life insurance policy of 10 times your yearly salary, regardless of age, because it is simple to calculate and comprehend. However, other crucial elements, such as future spending, existing investments, and so on, must be considered, which are entirely overlooked in this method.

Factors that influence your life insurance premium

Once you’ve determined how much life insurance coverage you’ll require, you’ll need to determine how much the premium will be. Although you must have adequate coverage, your premium must be reasonable. Let us see how the following factors influence your premium amount.


The age of an insured is critical in determining the amount of life insurance coverage necessary and the premium. Younger folks require more excellent life insurance coverage since they are more responsive to their family. Furthermore, because the danger of paying a death benefit is more negligible for younger people, the premium is reduced as well.


Because most of us are conscious that ladies have a longer life expectancy than males, most insurance firms offer a lower premium to female policyholders than male policyholders.

Medical History

When you obtain a life insurance policy, an insurance company may request a medical examination. This is due to the fact that certain health issues, such as obesity, high blood pressure, high cholesterol, and so on, can lead to an increase in health-related difficulties. As a result, the insurance provider charges a higher premium in such circumstances. If the health risk is really high, the insurer may potentially deny the coverage application.

Now you have a good idea of the factors that influence your premium amount. There is one more important thing you need to know. Hear that your life insurance policy will terminate if you do not pay the premium even after the expired grace period. As a result, it is not suggested to get excess coverage because it may result in a premium burden.


Life insurance coverage requirements fluctuate over time; consequently, it is critical to assess your insurance requirements on a regular basis. Furthermore, the approaches described above only provide an estimate. Your financial situation should determine the ultimate insurance portfolio. In addition, if you want to know more about this, visit Aditya Birla Insurance’s official website now.

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