The base of the financial planning pyramid involves in ensuring the financial security against the possible risks to an individual. These include the morbid event of mortality, risk of disability due to accident or disease and the risk of disease itself while the prominent being the death of an individual.

We generally tend to make plans and accordingly investments for various needs but how would one ensure their continuity in the event of death? The best and most economical way to cover this risk is through availing a term insurance plan.

Term plans are, generally, no-frills insurance plans which cover the event of death of an individual by assuring an amount i.e. one could get covered for a certain period for a particular amount for a fixed premium. As there is no maturity in these plans, the premiums are usually low when compared to any other traditional or Unit Linked plans. This gives an advantage for an individual to opt for higher insurance covers at marginally lower premiums.

The premiums vary according to age, tenure and cover. While opting for term plans, one of the grave mistakes to commit is to opt for a lesser duration i.e. a 25 year old person opting for a 25 year cover which lasts till age 50. At the beginning, 25 year tenure might seem like a stretch but it’s exactly at the higher age groups one need the insurance cover. The reason being the life cycle requirements i.e. the possibility of dependent kids and longer term loans like housing are high during the early 50s and an uncertain event (death) would burden the family. So, it’s always wise to insure for maximum possible periods and at least for the productive periods of life. And with the availability of online term plans, the costs have drastically come down. Material facts like the consumption of tobacco, alcohol and any existing illness have to be declared truthfully. Also, the details of other life threatening hobbies or occupational hazards shouldn’t be hidden as they act as detrimental at the time of a claim.
Despite have continuous education about term insurance, the important question, however, remains is how much is needed? This is something one needs to assess and calculate before opting for an insurance cover. There are numerous calculations to arrive at a figure but none sacrosanct.

The biggest challenge lies in assessing the extent of cover required for an individual. The most common method of calculating HLV is the total expected earnings of an individual for his lifetime i.e. the total possible earnings for the reminder of one’s working life.

Even this estimation is not simple and one yardstick is the current earnings multiplied for the rest of the earning years, usually till age 60. For instance a 30 year individual is currently earning Rs 5 lac per annum then the possible earnings could be for the next 30 years (till 60) is Rs 1.5 Cr. So, the HLV is 1.5 Cr, in other words, the insurance cover should be for the same.

The other practical way of covering life is to protect at least to the extent of current liabilities. Continuing the above example, if the individual has a loan of Rs 3 lac and aged parents to be supported at rate of Rs 30K per annum and assuming their dependency for the next 15 years, the total liability comes to Rs 33 lac. Thus, HLV also becomes a measure or benchmark that one needs to arrive to meet all their needs. One needs to understand that these costs will remain irrespective of the individual’s presence. With incidence of mortality being high at higher age groups, the premiums tend to be cheaper at lower age groups. Remember always, that wealth can’t buy you insurance but health and only health can. So, get insured young to enjoy cheaper premiums.