On seeing this advertisement, one of our readers called us and enquired how to arrive at this.

For the beginners, term insurance is a pure risk cover and does not carry any separate value.

Upon death of the policyholder, the insurance company will pay the sum assured to the beneficiary.

In the event of survival, the policy will not carry any maturity value.

While buying term insurance, the most common way to estimate the cover required is the income replacement method.

Usually in this approach, 6-12 times of annual income is suggested as the coverage required.

Because of its simplicity, this method is widely preferred.

Present value

The other way to arrive at the coverage is to estimate the expenses of the beneficiaries for which a present value is estimated.

At times the income replacement method may lead you to buying too much or too little insurance, whereas the expenses method may be more accurate. This is a straight forward method to calculate the sum assured, which replaces the income to the family in the event of premature death of the insured.

The sum assured is arrived at using disposable income (income minus expenses on self and taxes suffered on the earnings).

Disposable income is then multiplied by the number of working years of the insurer to get the required cover.

For instance, assume a male aged 45 is earning Rs 10 lakh per annum. He has 13 years of service left.

He suffers income-tax of around Rs 1.8 lakh a year and incurs personal expenses of 10 per cent of his salary. Nearly 30 per cent of his income has to be set aside for arriving at disposable income.

If Rs 7 lakh is his disposable income he can take risk cover for Rs 91 lakh.

This is assumed as earning interest equal to inflation.

Expenses calculation method

In this method, one has to add up all expenses that are likely to be incurred in the event of death.

These may typically include the amount his family would need every year to sustain itself, money to repay current debts and mortgages, money for children's education, emergency reserve, and funeral expenses too.

The total of all these amounts is the cover he actually needs to take today.

Ref :- http://www.blonnet.com/iw/2010/04/04/stories/2010040450741100.htm