Understand the Concept in simplest way  

A term insurance/ Life Insurance is a type of insurance which provides for financial cover during a set period chosen by the life insured. 

Why do we need term insurance ? 

Term insurance is a crucial financial tool that offers a safety net for you and your loved ones. Here are some key reasons why you might need it:

Protection for Dependents:

If you have dependents, such as children or a spouse, term insurance can provide financial support in the event of your untimely death. The death benefit can help cover expenses like mortgage payments, education costs, and living expenses.

Debt Coverage:

If you have significant debt, such as a mortgage or student loans, term insurance can help your family repay those debts. This can prevent financial strain and ensure a more comfortable future.

Financial Planning:

Term insurance can be a valuable component of your overall financial plan. It can help you protect your assets and ensure that your loved ones are financially secure, regardless of unforeseen circumstances.

Affordability:

Term insurance is generally more affordable than other types of life insurance, making it a good option for those on a budget.

Flexibility:

Term insurance offers flexibility in terms of coverage and duration. You can choose a policy that meets your specific needs and adjust it as your circumstances change.

What does Term insurance not mean or what it is not ? 

Cash Value:

Unlike whole life or universal life insurance, term insurance doesn’t build cash value over time. This means you can’t borrow against the policy or receive a cash payout if you surrender it before the end of the term.

Maturity Benefit: 

If you outlive the term of your insurance policy, you won’t receive a lump sum payment at the end. Term insurance is designed to provide coverage for a specific period, and there’s no payout if you don’t need it.

Investment Returns: 

Term insurance isn’t an investment vehicle. While it provides protection, it doesn’t offer any potential for growth or returns.

Guaranteed Premiums: 

While some term insurance policies offer level premiums, others may increase over time. This means your premiums could go up as you get older, even if you maintain good health.

How to Know Your Sum Insured ?

By annual income method:

Determine your annual income:

This includes your salary, bonuses, and any other sources of income.

Choose a multiplier:

The multiplier is a number that determines the amount of coverage you need. Common multipliers range from 5 to 10 times your annual income. A higher multiplier provides more coverage, but also increases the premium.

Calculate the sum insured:

Multiply your annual income by the chosen multiplier.

Human Life Value (HLV)

method is another popular approach to calculating the sum insured in term insurance. This method focuses on the financial value that an individual brings to their family through their income.

How HLV works:

Estimate your remaining working years:

Determine the number of years you expect to work before retirement.

Calculate your average annual income:

Estimate your average annual income over your remaining working years, considering potential salary increases and promotions.

Factor in inflation:

Adjust your average annual income for inflation to account for the rising cost of living over time.

Determine the discount rate:

This is the rate at which future income is discounted to its present value. It’s typically based on the rate of return you could achieve on your investments.

Calculate the present value of your future income:

Multiply your adjusted average annual income by the present value factor, which is calculated using the discount rate and the number of remaining working years.

Conclusion :

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